The markets continue to rage back and forth like never before, and obvious trades like shorting low-grade debt are stamped out in a moment by the latest, unprecedented Fed actions adding to the difficulty of this market. I discussed placing some limit put orders in an effort to go long silver at the beginning of the month and that those orders went unfilled. To clarify, I was looking at entering either SIL or SLVP, both silver ETFs. What I have ended with is a spread of options on CDE, Coeur Mining, Inc.
Coeur is a holding in both ETFs. It is a Junior gold and silver miner with holding primarily in the US but also in Mexico and Canada. I have gone long the security by selling the $8 put with a 9/2020 expiry. The option premium was $4.83. I used $0.45 of the proceeds to buy $2 puts with the same expiry, just to hedge away the last loss. So if I have to buy the shares at $8, they will only have cost me $3.62 each [$8 – $4.83 + $0.45 = $3.62]. The spot price was $3.13. I received a large payment of $4.38 net cash per share, have only $1.62 of value at risk per share, and have exposure to this security issue’s upside if elements of the current macro trend play out as expected.
The big-ticket macro features that I expect will impact this trade are not limited to my thesis about the gap up in silver prices. CDE will also benefit from the expected rise in gold value. And maybe most exciting and least considered is the potential impact that low fuel costs are going to have on the extraction price for metals. I expect these gold and silver miners to be printing money like the New York Fed before the end of the third quarter. Timing is always difficult though and it is possible that price discovery won’t have manifested in the stock price before my options expire.
I am also very cautious about what is happening with the dollar. I, like many, continue to expect a strong and probably rising dollar across this option period. A really strong dollar may be too much headwind for metals prices. Another risk is liquidity selling. If people just need money to live and must start selling their gold stash to stay afloat, increased selling pressure could serve to keep a lid on some of the crazy gains that would otherwise manifest.
I have re-visited this trade today during the trading session and it looks still available. There have been a few analyst actions on CDE since I initiated the trade. On April 14th Canaccord downgraded CDE from buy to hold with a $3.50 price target. B. Riley has maintained its buy recommendation and raised its price target from $11 to $13. Consensus estimate is about $6. The Q1 earnings call is scheduled for April 22nd. I will be excited to hear guidance and see first quarter performance.
Though I only took a pretty small position, I did not expand it today. I continue to approach the market and risk management with extreme care. This is a speculative trade, and investors should do their own research. I would welcome feedback on this trade an thank you for your attention.