There was an error in the pricing of one of our Secret Santa hedges and the price is so much better than we thought that it's going to be our 2017 Trade of the Year.
I urge you to check out all of our Secret Santa’s Inflation Hedges for 2017 (fixed now)
Here's what I said to DC when he pointed it out in the live chat room.
SLW/DC - I think I started with 2019 and then changed my mind but forgot to change the strike. Well, there's two ways to play then because the 2018 $15 ($4.75)/$20 ($2.65) bull call spread is just $2.10 so you can do 10 of those and only 5 short puts for net $1,200 (or sell 7 puts to net $600, etc) and you lower your downside exposure or you could take the $12s and be back to the original price with a better spread. For me, it comes down to how worried I am that SLW will be below $15 in 2019 (not very) and then would I pay $2 to roll from the $15 calls to the $12 calls and THAT is a firm no.
So, officially, the trade change would be (and we'll add it to the OOP as our 2017 Trade of the Year):
- Sell 10 SLW 2019 $15 puts at $2.80 ($2,800)
- Buy 15 SLW 2018 $15 calls at $4.75 ($7,125)
- Sell 15 SLW 2018 $20 calls at $2.65 ($3,975)
That's net $350 on the potential $7,500 spread for a gain of $7,250 (2,053%) gain if SLW is at $20 in Jan 2018 and stays over $15 in Jan 2019. Worst case is owning 1,000 SLW at $15.35 and the spread, of course, is already $2.75 in the money ($4,125) - what's not to love!
In the LTP, we'll make a similar play but we can afford to take a different risk so it will be like this:
- Sell 20 SLW 2019 $17 puts for $4 ($8,000)
- Buy 50 SLW 2019 $15 calls for $5.90 ($29,500)
- Sell 50 SLW 2019 $25 calls for $2.70 ($13,500)
- Sell 20 SLW June $20 calls for $1.45 ($2,900)
That's net $5,100 on the $50,000 spread and we're only obligated to own 2,000 shares of SLW at $17 ($34,000) plus, if we lose the $5,100, it's $39,100 or $19.55/share so a bit riskier but two years to goal and 6x more upside is worth the risk, mostly because it's a LONG-TERM portfolio and if SLW goes south for 2 years, we can go 2 more years no problem.
