A strategy idea for options trading investors.

TRADE COMMENTARY:

We believe that gold stocks have lagged in performance in relationship to the actual commodity. Since a lot of companies have not sold production forward, they will benefit from higher gold prices. Plus, with concerns over European debt problems and inflation, we believe in owning real assets and companies that deal in real assets. Per usual, we want to get into a trade that has limited downside. However, for those willing to accept more downside risk, you can buy the stock, which we don’t mind doing at these levels, and sell calls against it.

Silver Wheaton (NYSE: SLW) is an international silver streaming company with 14 long-term silver purchase agreements and two long-term precious metal purchase agreements. It also has exposure to gold.

DATE: July 6, 2011

STOCK/INDEX: SLW

STOCK PRICE: 35.25

NEXT ESTIMATED EARNINGS: August 8, 2011

OPTION PLAY: Short Put Spread

SELL/STRIKE/MONTH/PRICE: 1 August 35 Put @ $2.05

BUY/STRIKE/MONTH/PRICE: 1 August 32 Put @ $0.95

NET COST: 2.05 – 0.95 = $1.10 Credit

Option Sold – Option Bought = Net Credit

BREAKEVEN: 35 – 1.10 = $33.90

Strike Sold – Credit Received = Breakeven

MAX PROFIT: 2.05 – 0.95 = $1.10

Option Sold – Option Bought = Max Profit

MAX LOSS: (35 – 32) – 1.10 = $1.90

(Spread Width) – Net Credit = Max Loss

Stutland Equities is a premier futures and options trading company on the Chicago Board Options Exchange. Founded in 2005 and headquartered in Chicago, Stutland Equities specializes in volatility arbitrage across multiple asset classes.