The Stupidest, and Luckiest Man Alive – The Silver Wheaton Story

by JDH on March 12, 2011

Yes, it’s true: I am the stupidest, and luckiest, person in the world. Here’s the story:

As regular readers will know, I will occasionally do a covered write on stocks I own to lock in gains.

For those of you who have no idea what I’m talking about, a “covered write” means you sell options against stocks you already own. For example, if I own 100 shares of ABC Company, and ABC Company is selling for $50, I could sell one contract (which represents 100 shares) of the March 50 call options. I have sold the options, so the person who bought them has the right to purchase 100 shares of ABC Company from me for $50 up until the third Friday in March (because I sold the March 50 calls).

Why do I sell the call options? Because I get a premium for them. For example, a few weeks before expiry, if ABC Company is trading for $50, I might be able to sell the $50 calls for $2. If on option expiry date ABC Company is trading for $50 or less, the person who bought the options from me won’t exercise them, and I get to keep the $2 premium I took in. Of course this can back fire on me. If ABC Company goes up to $60, I will be forced to sell the shares for $50, so I don’t get the $10 gain; all I get is my $2 premium.

Done correctly, covered writing of options is a low risk, conservative strategy. In a sense, you can’t lose. If the stock price remains constant or goes down, you keep the premium, which reduces your cost base, or reduces your loss. If the stock price goes up, you lose your stocks, but you did get the premium, so you make money (just not as much as you would have made if you hadn’t covered).

Options can be very risky, if you are either buying them, or selling them naked. (Selling naked means you sell call options on shares you don’t own, so if they get exercised you have to go out and buy the stock, and if it’s gone up in value you can lose a lot).

Buying options is risky as well. You can make a lot, but you can lose everything. If I buy call options and the price of the stock goes up, I can make one or two times my money. Of course if the price of the stock declines, my options expire worthless. (You can read an even more detailed example of all of this in my post on Volatility is Your Friend).

So, with that long preamble, here’s why I’m the stupidest, and luckiest, person in the world.

In January, thinking that the precious metals market was going to go up, I placed a small bet on SLW.TO – Silver Wheaton Corp. by purchasing some February call options.

On January 4, 2011, when Silver Wheaton was trading around $36.65, I purchased 10 contracts of the February 38 calls, at a cost of $1.85 per share, which for 10 contracts cost me $1,850, because each option contract represents 100 shares. (Actually, with commissions, it cost me $1,872.49). Unfortunately, all precious metals continued correcting, and I was losing money.

I guessed wrong, and instead of Silver Wheaton going up, it continued to drop, like all precious metals stocks.

So, to average down my bet, on January 7, 2011, when Silver Wheaton was trading around $33.19, I purchased 10 more contracts of the February 38 calls, at a cost of $1.05 per share, which lowered the average purchase price of the 20 option contracts I now owned.

On January 13, in an effort to not put all of my eggs in the options basket, I actually purchased 500 shares of Silver Wheaton for $32.35 (indicating that the share price had fallen more than $4 from when I started buying on January 4). Not good.

Not one to admit I was wrong, on January 14, 2011 I purchased 10 contracts of the February 34 calls, at a cost of $1.33 per share. At this point Silver Wheaton was trading at around $31.38. Notice that I paid roughly the same amount for the $34 calls as I had paid for the $38 calls a week and a half earlier.

Where did that leave me? By mid January I was the proud owner of 30 options contracts that were out of the money, and on track to expire worthless on February 18.

Now, as I described above, I generally do covered writes, selling the options against shares I own, not buying them, because that’s somewhat risky. So, while I knew I had done something with the options, I forgot that I purchased them.

So, on options expiry day in February, Friday February 18, I just assumed the options would expire worthless, so there was no action required on my part. My boys had the day off school, so I took them skiing for the day. We had a great time.

My broker, TD Waterhouse, realizing that my options needed to be exercised, were frantically calling my wife, asking her what they should do. She responded by telling them that I was on a ski slope, so there was no way to reach me (I don’t take calls while skiing). She simply said to TD: do whatever you think is best.

And they did. They did all they could, which was to exercise the options. On Friday February 18 the shares of Silver Wheaton had increased to $38.68, so obviously my options, which gave me the right to purchase shares at $34 and $38, were “in the money”.

So, at the close of trade on Friday February 18, unbeknownst to me, I became the owner of 3,000 more shares of SLW.TO – Silver Wheaton Corp. These transactions occurred in one of my margin accounts, and it’s an account that I don’t watch each day. So it was with great surprise when I checked my account this week to see that I owned 3,000 additional shares of SLW.TO – Silver Wheaton Corp., and I had a negative cash balance in the account of about negative $100,000. Fortunately for me I had enough cash and margin room in my account to complete the original transaction.

I am therefore stupid for two reasons: First, I’m not watching what I own. Had I been “on the ball”, I would have realized that option expiry date was approaching, and I could have either sold the options (at a profit) or decided to exercise them. Either way, I would have been in control of the situation.

Second, I’m stupid because I didn’t realize what had happened until three weeks later! Sheesh, that’s embarrassing. (I said “Sheesh”, not “Sheen”; you can read about Charlie Sheen everywhere else; the only stupid person we will discuss on this blog is me).

Now, here’s the lucky part.

On March 9, when I realized what had happened, I decided I was probably over-invested in SLW.TO – Silver Wheaton Corp. , so I decided to sell 1,000 shares. Fortunately I was able to sell them for $42.15.

Yes, you read that right. I didn’t realize that I had bought the shares for $34 and $38, but being able to sell them for over $42 was really lucky.

As of today I still own 3,500 shares in that particular account: 2,000 shares from the options play (3,000 purchased unknowingly, less the 1,000 I sold this week), plus and additional 1,500 shares (including the 500 shares I purchased on January 7 as noted above). SLW.TO – Silver Wheaton Corp. closed on Friday at $40.73, so it could be argued that I should have sold everything on March 9. However, since I’m still optimistic on the short, medium and long term prospects for these shares over the next few weeks and months, for now I’ll sit on them.

Of course I could do the sensible thing and do a covered write to lock in some profits, but given my recent track record I’ll probably so the opposite, and either lose a bundle, or make a bundle. You never know.

In other news, as those of you who follow me on Twitter know, as I tweeted on March 8 I purchased shares of SSO.TO – Silver Standard Resources, Inc., on the assumption that we were about to break through a double top, and head for new highs.


The arrow indicates where I made my purchase, just before the two day correction began. What’s the lesson here, people?

You should buy high, not buy almost high. On December 6, 2010 Silver Standard closed at $29.50. On Monday March 7, Silver Standard, intra day, touched $29.50, but did not exceed it. On March 9, intra day, Silver Standard got to $29.33. Obviously neither day was a new high, and my mistake was to buy too early. If I was smart I would have started buying at $29.75, or perhaps even $30, because that would obviously be a new high.

(The point of a new high is that there is no overhead resistance. At a new high everyone who owns the stock is sitting on a profit, so everyone is happy, and happy people are less likely to be selling).

Fortunately I did not buy on margin, and I did not buy options, so I can afford to wait for a day, or a week, or a month until it actually makes a new high.

I made one other purchase this week: G.TO – Goldcorp Inc.. Why? It’s a gold stock, I’ve owned it for a long time and I wanted to increase my holdings, it actually pays a dividend (albeit a very small one), and it appears to find support at the 200 day moving average. Here’s the chart (click to enlarge):

I’ve drawn blue arrows every time in the last year where the 200 day moving average has acted as support. Obviously there were two obvious occasions where it didn’t act as support (the red arrows). So, the logical conclusion is that if the 200 day moving average holds, the stock is likely headed higher. I decided not to wait until we get down to around $44.33, since I didn’t want to miss it. I may decide to put in a stink bid at $44.50 to pick up some more.

Or, perhaps I’ll buy some call options if we get close to that level.

If I do, I’ll keep a closer eye on it, and make sure I either sell or exercise, so that I know what’s happening.

I’ll plan to do a better job of keeping my eyes open this week.

Thanks for reading the blog of a guy who clearly has no idea what he’s doing; see you next week.

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