Gold and silver prices have taken a dive in the past two and a half years. Silver prices have been cut in half since their 2011 highs, while gold has "only" shed about a third of its value since then.
Currently, silver is trading around $20 an ounce, and gold is trading at about $1,250 an ounce.
Silver Standard Resources (Nasdaq: SSRI) is a major producer of silver, zinc and gold, based in Vancouver, British Columbia. Its main business is the exploration, development and acquisition of silver-dominant properties in the Americas.
As you can see in the chart below, SSRI (black line) sold off with the price of silver. But the stock seems to have hit bottom in October, with a low just above $5. Since mid-December, SSRI has been in an uptrend. It also appears to lead the metal (in both directions).
A call option is an option to buy or sell shares at an agreed upon price (the strike price) within a certain period of time. The buyer of a call option purchases the right but not the obligation to buy the shares at the strike price. The seller of a call option sells the right to the buyer, and therefore, assumes the obligation to deliver the shares at the agreed upon price should the buyer choose to exercise her or his right.
With SSRI trading at about $7.50 per share at the time of this writing, we can buy 100 shares and simultaneously sell a March call option with an $8 strike price, which is currently trading for about $0.50 and expires March 22.
Since we receive $0.50 for selling the call, our net cost is lowered to $7 per share. To give you some wiggle room, I like this trade at a net cost of $7.25 or less.
Here's how this covered call trade could work out:
If SSRI is below $8 per share on the third Friday of March, the call option will expire worthless. We then have the ability to sell another call option against the shares to generate more income and lower our cost basis further.
If SSRI does trade lower, we would not experience a loss unless it falls below our net cost of $7.25 or lower, giving us a cushion of at least 3% at current levels.
If the shares rise above the $8 strike price, the buyer will buy the shares from us at $8, giving us a gain of at least $0.75 per share, or 10.3% in 66 days. This works out to an annual rate of return of 57%.
Action to Take --> Using a covered call strategy allows you to generate income as you wait for more upside in SSRI while protecting yourself on the downside.
This article was originally published at ProfitableTrading.com:
Silver Rebound Offers 57% Per-Year Potential for Income Traders