Note: This is not financial advice.  I’m not a financial advisor and I’m wrong 100% of the time.  Investments are risky and nothing mentioned here should be considered financial advice.  Invest at your own risk.

Note of caution – you have to work with your broker on how your long call options work.  If they automatically assign you, and you are in the money, you may have to pay up thousands of dollars (you can turn around and sell those stocks immediately then).  Just be aware that as expiration comes, you have some choices to make and you need to understand how your broker deals with this.  

Some of my facebook friends have been asking me what the deal with options are.  I have to admit, I didn’t know anything about them until one of my friends discussed a little about them a few months ago with me.  I got involved, and of course made silly mistakes right off the bat.  Today, I’m using them as an ATM for me.

Note – on the risk scale of investments, these can be on the high end.  If you do them a certain way.  You can also have them much lower risk.

What is an option?  I’m going to walk you through a recent trade I focused on, and it as an example.  You can have a LONG CALL option (which means you want price to go up) or a SHORT PUT option (which means you want the price to go down).

If you are investing in stocks, you want price to go up, right?  Yes, but sometimes prices go down.  Imagine you are a coin dealer and buy lots of silver at $17 per ounce.  You take delivery, and the next day, the price drops to $14.  How do you stay in business?  For the big bullion dealers, they may also “hedge” their investments.  They would take the coins and hope the price goes up, but also place a bet that silver goes down.  If silver goes down, they win the bet but lose on the upside of the coin value.  If silver goes up, they win on the coin value but lose on the bet.  Therefore – their business model relies on a premium to sell the coin and not the underlying spot price of the coin.

An option is a contract that allows you to control 100 shares of a stock.  This can get far more complicated, but I’m going to pass on what I have done.  For example, First majestic is a silver producer (60% silver and 40% gold by revenue).  When the price of silver goes up, their stock price tends to be very sensitive to the price of silver.  So – if you have a good idea that your predictions on silver are going up or down, you can then make a bet that the price will be x in the future.  And, stocks that are sensitive to that will also move up.

So I’m interested in doing a long call option for AG.  If I were to go and buy the shares outright and “go long”, I’m looking at 100x$9.39 (current price) to then have a cost to me of $939.  If I used a call option, I only have to put up a fraction of that $939.  You have to then decide a “strike price” and due date.

Generally speaking, there are a few aspects to price of the option here.  You have the time premium and where you feel the strike price will be.  For what my example is, let’s take a look at some fundamentals.

On the chart below, I bought AG option for $9 for Jul 2 at an average of $.47.  It was at the second to last red candle on the way down.

AG 06222020-0940

Stepping back to see AG from the last 3 months, I noticed the bull pennant formation.AG macro

This is what the bull pennant/flag looks like

bull flag

What I saw forming was a technical item called a bull pennant – which has a flagpole that runs up in a bull manner and has a “healthy pull back”.  AG 06192020

Many of us who don’t look at these charts everyday just assume that when stocks go up, they just go straight up.  They most certainly do not.  They run up, pause, come back a little as people take profits on short term trades and then….people think “this price is too cheap, I need to buy up”.  And you then get a breakout back up.  This pattern holds true about 80% of the time, and traders wait for the green candle that breaks up that you see above.  Problem is. I saw the pattern and felt it might break up early, so I pulled the trigger….early.  I used ETrade power Etrade to draw these out and the green lines I added in paint as the possible destination of the price.  You know when you watch hurricane coverage and they have the cone?  Well, that’s how you can sort of predict price at times.  There are some other fundamentals that supplement the price action here, which I’ll get into later.  That being said, my models predict a $10.68 price for AG on july 1st.  Give or take.

I bought 20 call options for AG at strike price $9 for Jul 2nd.  When I bought the options, I bought them OUTSIDE THE MONEY.  Meaning, it had not hit $9 yet.  Or, maybe it was $9 at one point, but no longer was.

When I bought these options, the price was about $8.75.  My bet was that I felt the price of the stock would be over $9.  If so, on July 2nd, I then have the OPTION of buying 20 contracts for $9 each.  That is 2000 shares at $9 each, or $18,000. (Edit – I will not have to pay $18,000 – more on that below).

Now…if Jul 2nd hits and the price is $8.99, the option expires worthless.  You don’t have to do anything.  But..what if the price of AG hits $11 on Wednesday?

That means that you have the option of buying 2000 shares at a price of $9, for $18,000.  However, those 2000 shares are now worth $11×2000 = $22,000.  You also paid a premium of $.47 for each share.  So….take that off, and you roughly have = $22,000-$18,000 = $4,000.  $4000-$940 = $3060.

So, on a bet of $960 I then would PROFIT $3060.  I could then take that $3060 and wait a few days/weeks for the price of AG to go down a little on another pull back to $9, and then buy 400 shares outright with that profit.

Typically, what I’m doing is taking half of my winnings and buying stocks and taking the other half and using them on my next option plays.

This $960 was pure profit from my last play which I mentioned previously with MTZ.  My problem with that one was I cut out WAYYYYY too early and could have gotten a good 7k had I just stayed another week into the deal.

 

With options – a funny thing happens.  That time premium affects price. So does the price of the stock.  So I bought 20 of these for $.47 each at $940.  But…..

AG 06272020

So get this, those options I bought for an avg of $.47 were now hitting $.70 in value due to the price of AG going over $9 almost immediately.  What I then did was take 10 of the 20 options and sell them for $.70 at a limit price.  That is, $700.

I now controlled 10 options at a cost to me of $240.  But wait, there’s more.

I was also anticipating another price drop – this exact same scenario played out end of May into Jun 1st as the price of silver was slammed by major shorts trying to buy on the spot market to cover their contracts and this would have the effect of a short squeeze.  I waited for the price to get slammed, and BAM.  The options I sold on Thursday for $.70 were now selling for $.25.  I bought up as much as I could with an average of $.28 – this was 9 options for $252.  Within minutes, the silver price had dropped $.40 and recovered $.40.  And I just made out like a bandit.

Currently, I’m sitting on 19 call options at an average price cost of $.38 (that’s an Etrade dollar cost average).  Remember, my first batch of 10 now only cost me $240, and this new batch of 9 was $252, so my cost of options at this moment is $492 and the current market value is $990 if I wanted to sell at this moment.  So my true cost right now is $492/1900 = .258.  So any price over $9.26 I’m making out like a bandit.

However, going back to the fundamentals – long story short, I’m making a bet that the silver price will continue to go up through Weds, 7/1.  I COULD BE VERY, VERY, VERY WRONG – so DO NOT take this as investment advice.  At issue is there’s a problem with the trade mechanism that sets the price for silver on the COMEX.  Long story short, there’s a lot of “paper trading” that is detached from the supply/demand aspect of the underlying commodity.  Based on how their contracts work, and the end of the banking quarter, and banks wanting to roll contracts – this same scenario seemed to play out in early June.  Let me show you what I observed in June, and subsequently, the move south in silver price from June 2 caused the bull pennant in the silver stocks.  Look at the green circle and what price action I’m looking at.

AG June move

Notice the green candle on 6/1 and the red candle on 6/2?  My options expire 7/2, and I don’t want to get caught in that.  I believe I can call them on 7/1 and exercise the options, if I want.

While I’m anticipating a price of $10.68, it could be $10…or it could hit $12.  Don’t know.

That being said, these options are paid for with house money.  If I can get a good price on Weds and not have to buy the stocks, I’ll sell the options for a slight discount and get all of the cash.

Let’s compare….

If when I first bought the options at $9, the AG stock price was $8.75, if I wanted to buy 1900 shares, it would have cost me $16,625.  To buy 19 options now has cost me $492 of house money, after selling 10 of them at a good profit.  Lets assume for sake of round(er) numbers that on 7/1, AG hits $11.

Stock purchase…

$11-8.75 = $2.25×1900 = $4,275.  This means you put up $16,625 to make $4,275 in profit. Or, 25.7% return.

Call option

$11-9.26 =  $1.74x 1900 = $3,306.  This means you put up $492 to make $3,306 in profit.  Or, 672% profit.

So…not only do you put up 30x less money, but you get 6x on your return.  THAT is the payoff potential.

However, the risk is this….

All of my fundamentals are sound.  The silver price prediction is sound.  The bull pennant call was RIGHT.  But, what if another round of lockdowns is announced and ALL stocks tank?  This happened in March and took the precious metals and mining stocks down with it.

If you own the stocks and have 1900 AG stocks, you can wait a few months for the price to recover.  Your risk of loss is ONLY if you sell when the price is low.

With a call option, I’m OUT.  It expires worthless.  I lose all $492 and nothing else.  I get zip, zero, nada in return.  but I don’t owe anything either.  It’s an OPTION to buy at that price.

That being said, that $500 is “house money” I’m using.  If I lose it, so be it.  On 7/1, if things aren’t looking great, I could possibly unload them for $200-$300, costing me maybe $200.  How many of you pay $50-$100 when powerball comes out for $100 million?

You will spend and risk $50 on $100 million, where your odds of winning are 1 in 272 million, but $200 loss risk on an potential $3,000 payoff with 80% possible success is “gambling”?

I’d like to call this, “meteorology of the financial system”.  There are others out there that know the silver price is going to do certain things, but not a whole lot of people who then married this up with how to use the options market to your advantage.

 

So where my weather forecast is now, is somewhere in the $10 range.  Could by $9.50, could be $11+.  No way to really tell.   Look at the green candle finishing Friday – when it finishes at the top of a candle like that, it’s also strong forward momentum.  Good sign for a “gap up” soon.  It doesn’t always work like that though, but this is a statistical game here.  You play the odds, sometimes you win, sometimes you don’t.

This was an example of a short term play using OTM (outside the money) call options.

 

Another example may be “deep in the money” ITM calls for a 3-6 month period out.  I don’t have the sheets up in front of me, so I’m going to use ballpark numbers.

Today, the share price of AG is $9.39.  Let’s assume there’s a strike price of $8 for October 2020 (I used to own them and sold them when the share price was over $10.50).  When you buy these, you have a fraction of the share price you are paying, but also a “time premium”.  There’s also some volatility there, as share prices that move up and down a lot more get money added to this price as attractive.  If the share price hasn’t moved much in 2 years, you won’t have this.

So I want to control 2000 shares of AG.

Purchase – 2000 x $9.39 = $18,780.  Maybe by October, the price hits $12!!  This means you can then sell for $24,000 at a cost of $18,780 = $5220.  Or, 28% return.

Options (these will cost more because there’s a great option of it finishing in the money and the time premium). Today, these are $1.84 Times $100 =$184 per option.  For 20 options, you are looking at $3,680 cost to control 2,000 shares rather than $18k.

If you go to sell these, the math gets a little more confusing.  You take the $12 price and subtract ($8 + 1.84 = $9.84) = $2.16.  Take that and multiply by $2000 = $4,320.  So – you put up less on something that expires further out and you are deeper in the money, so you now get $4,320 on $3,680 put up.  It’s still a 117% return…but it is not the 6x return I got above.  Why?  Less risk.  More time premium baked into that $1.84.  As time gets closer, that time premium disappears, so if you try and sell it closer to the time, you may lose the time premium.

All in all, if you believe a stock like AG may go to $12 in 3 months, a long call option is a way to use leverage to get the same cash back from owning stocks with putting much less money out to do so.

 

Side notes with all of this.

If I’m buying AG options for $.50 for a strike price of $9, it could close on the last day at $9.01 and my broker would assign me those 1900 shares.  But, if I paid $.50 in already, and the stock price is $9.01, it makes no sense to have, in essence, paid $9.51 for a $9.01 stock.  So…

  1. I try to get options at the lowest cost possible, and I try to sell some options on a rise in price to make my out of pocket costs lower.  For example, 20 options I’d sell 10 at some point to reduce my costs.  In my case, initial purchases of $940 gave me 20 options at an average of $.47.  I then sold 10 for .$70 to give me 10 options remaining at a cost of $240.  I then bought 9 more for $252.  This is how I get a total of $.26 dollar cost average for these.
  2. What you want to look for is a final price over your strike price plus option cost.  For example, my strike price was $9 and avg cost now is $.26.  So, anything over $9.26 is where I’m making money.   1900 shares, so every penny over $9.26 is equal to $19.  Understand that just because I may be “in the money” at $9.05, doesn’t mean I want to exercise that option.  Long story short, anything over about $9.25 I’m making $19 per penny in upward move.
  3. Have a price target.  With my BNO options, at one point I was well over 100%.  I should have sold some then.  I didn’t.  I got greedy.  I now learned, for ME, buy more options than I need and sell some off to lower costs on the ones you want.  Maybe there’s a stall in the stock and stormy weather coming.  Take your 40% and go home.
  4. Don’t get greedy – with BNO, wow I just saw the dollars going up and up.  And then they went down and down.  Take a profit.  Especially with short term trades.  With your longer term options, what I wish I would have done was cash out half to pay for the other half – then had the patience to let them cook for free.  Learn to “play with house money” and don’t gamble.

 

WARNING WARNING WARNING

On Weds, I’m closing up all of my call options when I think silver might hit $18.50-$19.  It might not.  My AG options expire Thurs, and my SLV options ($15 strike price, Oct) I’m going to close out.  I feel there may be a cliff coming – I believe all of my metals and mining stocks will be ok in the long run, but that could be a 3 month run back up like the last time.  Selling options on the way down is not a pretty thing.  I lost my ass on some BNO options a few months ago because I bought them before the bottom hit.  I had a ton of $6 and $8 options for Oct.  When the stock price was $10-$11, and I had bought them when the stock price was $9.30, my board lit up in lots of green.  Lots.  Then the stock price started heading south.  I sold them at half the value I paid for them.  Eventually, the price bottomed at $6 and last week the price was back up to $11 – and had I understood more about these then, I would have held on….and they would be worth a goddamn fortune now instead of the pennies I sold them for.

So – call options can be a good time.  One thing I also screwed up once was buying call options for Kohls on a date 3 days from then, rather than the 6 months out I wanted.  $500 or some shit.  I freaked.  Sold right away for like $20 loss.  Kohls then blew the hell up the next day and I would have been sitting pretty.  Just be careful of

  1. LONG CALL instead of PUT.  Puts are betting against something, and well, I don’t advise this for me.  There’s no upper limit to where a stock can go.  That can hurt.
  2. Strike price
  3. date
  4. when you go to sell, try a limit price between bid and ask on the upper side.  don’t do market.  That cost me $600 on one Kohl’s options sale.  I made mistakes early on, and am killing it now, but wow did I make some mistakes in March.
  5. Do “sell close”.  It’s screwy because you can also sell options that don’t belong to you, which is something else altogether.

 

Strategy….

When mid August hits, probably 80% of my portfolio will be longer hold mining stocks split between all kinds of miners with different risks.  5% may be the short term options plays to chase high upside moves like this AG play, and 15% will be longer term options plays – perhaps deep, ITM options for 6 months out.

Remember, metals are supposed to be in a 2-5 year bull market.  However, there’s a lot of risk.  LOTS.

  1. Mnuchin and Trump can just keep printing cash and somehow, someway find a way out of this.  This could be bad for gold if they pull some sort of stunt.  As of now, more money printing is a certainty to make gold go up.
  2. Your miner could have properties in countries not friendly to the US and could be nationalized.
  3. Your miner may have one single property and collapse.
  4. Strikes.
  5. Floods
  6. Bad management teams
  7. Currency reset
  8. Making it illegal to own gold (FDR did this in 1933).  Look it up.  Can you imagine doing that today with 300+ million guns in the hands of private citizens today?

Suffice it to say, there are counterparty risks to miners.  That being said, in a stock market heading south and all fundamentals lining up for precious metals prices to skyrocket – the best game in town appears to be miners.

How you want to buy long, do call options – up to you.  But I don’t throw darts at a board with short term call options.  This was my MTZ play a last month that I sold WAYYYY too quickly on.  MTZ got to $48 and I had at one point like 9 $35 options I had bought – some when the stock price was $29 and I bought for $30.

With the MTZ, I saw an ascending triangle…it was beautiful.  I just wish I had held longer.

ascending-triangle1

 

Now – also consider the GDXJ.  I was thinking a pullback was coming.  I was sitting on some cash and decided not to buy.  When I saw the bottom hit, is when I started buying back in to miners.  BUY ON THE DIP, SELL ON THE RIP.

Below was 5/22. I saw a weak green candle and all fundamentals were saying that gold was on a tear and would either pullback or go sideways for awhile.

GDXJ 05222020

This is what happened…

GDXJ0628

So – if you want to buy call options, get them at the bottom of your pennants, not at the top.  With GDXJ above, it’s an index of junior miners, so it is sort of a macro of how the sector as a whole is doing.  Some are doing better than others within, but using this index gave me a good idea of when to buy back in to mining stocks.  See the flag here as well?

All in all, the bull flag/pennant may give you a good entry point into stocks.  How many times did you buy a stock for it to immediately go down the next day/week?  It’s possible you bought on FOMO, or “fear of missing out”.  You bought at the top.  Traders then sell off, take profits, and you see the stock going down and bail out at the first sign of trouble.  When the stock gets to a certain level, traders then see it as undervalued, and buy back in.  It’s how a bull market works.  Tons of ups, downs, and side to sides.

These step backs are also called “retracements”.  And, believe it or not, they use something called the Fibonacci retracements to sort of gauge where to put stop losses and where to get back in.

In the GDXJ above, do you see all of the purple on my chart?  This is the Fibonacci retracement tool.  You start at the bottom of your recent big move and drag it to the top price.  You then see fib retracement levels of things like 21.8, 38.2, 50, 61.8, etc.  In a bull market, you may see “resistance” lines at fib levels.  This is a behavior analysis.

Consider above, GDXJ hit around the 21.8% and then bounced off of it.  The AG item bounced off of the 38.2 level.  CRAZY shit.  So – when setting stop losses, I often set them just below 20% of a move.  So in a day of trading, maybe your stock dips down 15% and recovers and rallies by the end of the day up 10%!  Problem is, if your stop loss was set too tight, you would have been stopped out at 15%, then lost the gains back.  It’s frustrating!!

I try to set mine around 22%.  Give or take.  Many times these flags are bouncing back before 20%.  If it drops below 20%, the next resistance level is 38%.  So I stop out at 22%, then hold.  If it rallies back at 38%, I buy back in.  It could also drop to 50%.  Buy back in then.  You need candles to move upward for a period of time to confirm it’s not a false breakout.

By understanding these levels, I’ve been able to set stop losses so I’m not stopped out of a dip and rally, but I also get stopped out at a reasonable time to then watch the stock fall further and then buy back cheaper.

 

My next long call option plays….

  1. Nothing until end of August.  2Q profits are going to lead to too much unpredictability.  It will be nearly impossible to predict prices and times in the near term, for anything.  Imagine being a weather forecaster and your doppler radar and satellites were out of commission.  That’s kind of what’s going on for the next 6 weeks with financial forecasting.  I can tell you it’s going to be hot, and it’s going to rain sometimes.  That’s sort of where I am with metals, but there could be a cold front for a short time as well.  Too unpredictable.
  2. In August, when the dust settles, I will be doing long calls on some of my favorite miners for 6 months out deep in the money.  I feel these stocks are going to move a lot, and I don’t have 100k to buy everything I want.  Using small amounts of money, comparatively, I can then buy stocks months out with long call options.
  3. In August, I’m going to re-evaluate some of these short term deals and look for more flag patterns in miners and look for ascending triangles with regular commodities.  For example, the MTZ option play I’m kicking myself over time and time again.  I was so right on it, but I didn’t have the patience to hold, nor the framework to have the discipline to hold.  I just jumped at the 100% profit.  It would have been like 1000% profit had I held.

For example – here’s what AG options look like for Jan 2021.AG options

For about $2.30 an option, you can buy at strike price $8.  That means, you would be betting that AG stock price would be higher than $10.30 on Jan 15th.  It’s at $9.39 now and it could easily be over $10.30 then.  How high do YOU think it will be?  If silver does indeed hit $20, how would that affect the stock price?  What do the analysts say?

AG rating

So – you can be bearish on them and not do it, or be bullish and see that inside of a year, an analyst picks $17.50.

Let’s just go over that analysis….

Let’s shoot for 2000 shares again.  Right now, you are looking at $18k or so to buy them and hold.  If it hits $14 in January, let’s do the math.

Buy – $28000 sale price minus 18k purchase, about $10,000 profit on 18k risked (~55%)

Options – $14-$10.30 = $3.70×2000 = $7400 profit on $4600 risked (160%)

You can lower you risk on your options further by going further ITM or extending out more.  This then reduces your upside, but let’s look.

AG options2

So – if I bought AG options at $7 strike price for Jan 2021, they would cost me about $4.10 for each option.  Let’s do 2000 shares again.

For $8,200 I’d be controlling 2000 shares.  Perhaps at one point the stock hits $14.  The cost for me is $7 for strike and $4.10 for the option, or about $11.10.  So, for each, it’s a $2.90 profit.  This then is $5800 profit on $8200 invested, or 70.7% return as opposed to 55% if you bought outright.

The deeper you are in the money, and the longer out, the less risk you have of losing that $8200.  That being said, if AG closes at $10 on Jan 2021, you’d then decline the purchase and lose your $8200 completely.  What you CAN do is about 45 days out from Jan 2021, if you have a bad feeling on this, you might sell them for 25-50% loss.  So you can have some cover that far out.

Many people do not hold options until the end.  If you are 4 months in and AG hits $14, that may have been your price target and you sell the options at that point.  Or…maybe you go nuts and hold until the end and AG hit $25.

What if……

Silver hits $50 in the next 2 years?  I predict AG’s stock price will hit $35.

Let’s do that comparison – using the long call option.

$7 strike price for $4.10 for 2000 shares equals $8200 cost.  If AG hits $35 due to silver spike, that means each share is worth $35 – $11.10, or $23.90.  For 2000 shares, that’s $47,800.  Or…5.82x.

Now – imagine this…you watch the next pullback in July/August and these call options are then $2.05 rather than $4.10.  In that case, instead of buying 20 options, you buy 40, because you know the metals just got hit and will rebound quickly.

40 options at $2.05 = $8200.  If AG hits $35 in the next 1.5 years, that’s $23.90 on each share x 4000 = $95,600 on $8200 investment, or 11.65x.

Point is – when you see larger macro pictures unfolding where the price of gold and silver will move higher, the options plays you buy on dips can provide you many multiples of your investment, if you have the patience.  In the above example – those 40 options for $2.05?  This would be after a deflationary event like in March.  I’d buy the shit out of the $2.05 and when they hit $4.10 again 1-2 months later, I’d sell 20 of the options to then cover all of my invested money.  Meaning, I would then have 20 options which could get me $47k with ZERO money invested.  That’s an upside!!

The downside, of course, is metals prices crashing for years and mining stocks tanking.  This would wipe out your options, or at least reduce them a lot.  This is why only a small portion of my portfolio I’d use towards options.