Testy Tuesday – Oil Blasts Back Over $100 but there’s a Silver Lining

Oil is at $101 this morning.

So we’ll all be paying for Putin’s war at the pumps.   Fortunately, as we discussed in yesterday morning’s PSW Report (which you can subscribe to HERE), we hedged that by being long on Silver (/SI) and Natural Gas (/NG) and our 2 Silver contracts are up $6,750 and our Natural Gas contracts are still at $4.50 – so still good for a new trade as the Ukraine offensive continues.

 $2,450 is our stop on /SI Futures, as we want to lock in a $5,000 gain but we’ll let it run otherwise.  Another hedge we really like is Barrick Gold (GOLD), the world’s largest miner, who have 69M ounces of gold reserves at an average extraction cost of $1,200 per ounce and, as a bonus, they also have 12Bn pounds of copper, which is currently trading at $4.50/pound though Barrick only has them booked at $2.75 so there’s a bonus $2.1Bn in the copper reserves and, at $1,900, the gold exraction profits would be $48.3Bn.  

As it stands, at $22.50, you can buy the whole company for $40.2Bn and they drop a solid $2Bn a year to the bottom line.  What’s really fun about GOLD, however, is that if Gold (/GC) just goes up 20%, to $2,100 – GOLD makes $200 more per ounce on roughly 5M ounces mined so that would be a 50% bump in earnings – performing better than the metal itself.  If Gold drops 20%, to $1,700 – GOLD still makes $500/ounce while holders of the metal simply lose their bet.  

Even better, we can play GOLD with options to give ourselves an even greater advantage.  GOLD was our 2019 Trade of the Year from when it was only $13 around Thankgiving of 2018 but, as a new trade, you can:

• Sell 10 GOLD 2024 $20 puts for $2.90 ($2,900)
• Buy 25 GOLD 2024 $20 calls for $5.40 ($13,500) 
• Sell 25 GOLD 2024 $27 calls for $3 ($7,500) 

That’s net $3,100 on the $17,500 spread so you have $14,400 (464%) of upside potential at $27and you are obligated to buy 1,000 shares of GOLD for $20,000 if it heads lower and, if your spread is wiped out, your net entry would be $23.10 – a bit more than gold is trading at today.  So it’s an aggressive play but we thing GOLD is a great value here and we certainly don’t mind owning 1,000 shares at $23.10 because, if it falls to $13 (where we bought it 3 years ago), we would just buy 1,000 more and be in 2,000 shares at $18.05 average.  

So the real question is – do we REALLY want to own 2,000 shares of GOLD for $18.05 and, if that is a definite yes, then there’s no reason not to make the above spread.  In fact, I’d almost rather own the 2,000 shares for a $6.50 discount ($13,000) than just make $14,400 and never get a chance to own the stock…

So there’s always something to trade – even in wartime.  Lockheed Martin (LMT) is our Stock of the Century and the century is still young but LMT has already climbed from $20 in 1999 to $433.80 at yesterday’s close and we didn’t buy it because of Afghanistand or Iraq or Crimea or Ukraine but because of fusion – which we think LMT will crack ahead of their competitors.  Still, the wars are a nice bonus and they are doing great recently.  

In our Long-Term Portfolio (LTP), our current LMT trade is already deep in the money, 2 years ahead of schedule:

As you can see, we took advanatage of the sell-off in September and bought 10 of the 2024 $300/370 bull call spreads for net $32,800 and we sold 5 of the 2024 $300 puts for $18,360 to help pay for it – much like the GOLD play above.  So the whole spread was net $14,440 and we were promising to buy 500 shares of LMT for $300 which, like GOLD – sounds really good to me!  Already we’re at net $41,000 out of a potential $70,000 on the spread with $39,000 (95%) left to gain if LMT simply holds $370 into Jan, 2024 – aren’t options fun?  

Of course, at PhilStockWorld, those are just our leftovers as we’re in the middle of gaining $55,560, which is 384% of our original $14,440 outlay.  Like I said – FUN! 

There are always opportunities to trade in the markets – you just can’t go rushing into things.  The trade that seems hot when things begin to change don’t always stay that way as something like a war begins to drag on but certain trends take hold and we can ride those to amazing profits.  

As always, we keep our eye on the news and the news is currently that there’s a 40-mile long convoy heading for Kyiv – and not the kind with rubber duckies and such…  Sue, you might think “Why doesn’t the Ukraine just blow up the slow-moving convoy“?  That would be the subject of Donald Trump’s first impeachment, when he held the delivery of military weapons hostage if Ukraine wouldn’t dig up dirt on Biden’s son – ah, good times.  Trump stopped the delivery of hundreds of millions of Dollars in aid and, since he didn’t get his way, blocked all promised aid to Ukraine going forward as well.  

Trump pushed his Vice President, a key conduit between his administration and Ukraine, to skip Zelenskyy’s inauguration in April 2019, a decision that came as the newly elected Ukrainian president was seeking U.S. recognition to show solidarity against Russia. Pence later met with Zelenskyy in Warsaw, where they discussed Trump’s decision to freeze military assistance.  Fortunately, Biden hosted Zelenskyy last fall and delivered the Javeline missiles that have been so effective against Russian tanks – part of a $650M aid package Biden began shipping in December.  

Provided courtesy of Phil’s Stock World.