With SLW under heavy selling yesterday, we initiated the long side of our butterfly spread, buying four September 42 calls for 1.32 and four September 50 calls for 0.26. Now, we’ll look to sell eight September 46 calls short for 0.79, presumably on a day when Silver Wheaton shares are doing better.  A sale at that price would give us four “free” butterflies, and therefore no risk.  For comparison, if we were to short the September 46 calls at their current price of 0.50, the resulting butterfly position could do no worse than lose $58 per spread, or a total of $232 (plus commissions).  The maximum profit, based on a short sale at 0.50, would be $300 per spread — so we’d be getting 3-to-1 odds against an SLW rally into the mid-40s between now and September 16.  I think we can do better, and that’s why we’ll hold off shorting the September 50 calls for the time being.

Those who monitored the trade will know that things could have turned out far worse if we’d chased the options. The September 42s trade as high as 1.90 yesterday, and although the 1.32 we paid for them was not the best price of the day, it’s only 18 cents above the intraday low.  As for the September 50 calls,  even with SLW shares getting shellacked, they fell no more than a nickel below where we’d bought them after trading as high as 0.35.  Regarding the stock, as I noted during yesterday’s Hidden Pivot tutorial session, we should brace for more downside to at least $36, where a familiar trendline comes in as potential support.  Although it’s hard not to notice the perfect head-and-shoulders formation that SLW has traced out since late 2010, I’d suggested not worrying about it for now, if only because it is so obvious. Someone in the chat room mentioned that SLW has been a pretty good mine canary, and I would agree. The stock does seem to have a knack for sniffing out trouble before it occurs.