Leverage = Options, Leaps, and Warrants
With the recent explosive upward moves in the prices of gold, silver and most commodities investors are constantly searching for the best possible returns in this bull market. Some analysts suggest buying the gold bullion, others suggest a gold mutual fund, i.e., World Precious Minerals Fund (symbol- UNWPX) part of the U.S. Global Funds, headed by the savvy and well respected, Frank Holmes. Another choice might be Central Fund of Canada (symbol - CEF), a closed-end mutual fund which holds gold and silver as its principal assets and of course the purchase of common shares in the hundreds, if not thousands of mining companies.
Another means of investing in the bull market which will generate much more leverage and thus potential returns is through the use of options, leaps and warrants. Yes, these investment vehicles may increase your risk but they should at least be considered by all investors.
So what is leverage? Leverage (to us) means getting the maximum return with the least amount of your capital as risk.
So let's define and explain each of the above terms.
A call option is a contract that gives its owner the right, but not the obligation, to buy a specified number of shares at a predetermined price within a set period of time. Most options have a life of 90 days or less. Unless, you are an accomplished trader or just incredibly lucky, I would personally not recommend call options as a means of playing the mining stocks. You have to be right on the direction of the market as well as the timing. This is not so easy to do. Also, there are very few call options on stocks of mining companies with the exception of Newmont Mining and a few more of the big companies.
LEAPS which stands for Long Term Equity Anticipation Securities is also an option as defined above but these have a longer life of perhaps up to 2 ½ years. Yes, this gives you much more time but there are currently very few LEAPS trading on the mining stocks.
Options and LEAPS are actually created or written by investors or companies who write an option and keep the premium (the amount you paid) as income. The underlying company receives nothing.
In the very popular and highly recommended book, "The Coming Collapse Of The Dollar And How To Profit From It" by James Turk and John Rubino, they discuss options and LEAPS as a possible avenue for investing in the mining stocks. They did not discuss our third possibility, warrants, which we feel is more "investor friendly". Why? Because of the all-important element of TIME.
A warrant is a long-term call option giving the holder the right, but not the obligation to acquire the underlying security at a predetermined price and for a specified time. Warrants are actually issued by the underlying company, normally in connection with a financing arrangement and are sometimes called a "kicker" or equity kicker". Most warrants never trade but are held by Mutual Funds or other large investors who have provided the financing.
However, there are many warrants that trade freely on either the U.S. Exchanges or the Canadian Exchanges. These warrants trade similar to their underlying stocks and will fluctuate up and down with the price of the stocks. Usually there is no reason to ever exercise the warrant; the investor merely sells the warrant.
Warrants actually have a longer life than options and most LEAPS which is why we are partial to them. Warrants are usually issued for at least 2 years and sometimes up to 5 years. Timing seems to always be the issue doesn't it? So it is advisable to focus on warrants which have a remaining life of at least 2 years. There are many warrants which do not expire until 2008 thru 2010 giving investors more time for this bull market to develop. Currently there are warrants trading on companies mining gold, silver, copper, zinc, cobalt, platinum, nickel, diamonds and yes, even uranium. Perhaps ask yourself the question, would you rather invest say $10 per share for a common share or $1 for a warrant giving you the right to purchase the common stock at a specific price and exercising a few years in the future? It's all about Leverage!
Options, LEAPS and Warrants are all very risky but provide investors incredible leverage. If the underlying security does not exceed the exercise price by the expiration date, all of the above become worthless. Investors today have many choices into which to invest and should do so only after consulting with their investment advisor.