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Mining Stocks: Options, LEAPS & WarrantsDudley Baker Seems precious metals investors are searching for the mining stocks which will bring them the best possible returns in this bull market. We would not dare disagree with any of the recommendations given by any of our favorite analysts, including Adam Hamilton, Doug Casey, Jim Dines and J. Taylor. We only ask the question, "is it possible to generate even more leverage by purchasing options, leaps, or warrants on these recommendations?" Let me define and explain each of the above terms. Call Options: 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. 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: A LEAP 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 1/2 years. Yes, this gives you much more time but there are virtually no LEAPS on the mining stocks. Again, Newmont Mining and Placer Dome and a few others but all currently go out no further than January 2007. 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." Warrants: 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 whom have provided the financing. However, there are many warrants that do 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. 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 we prefer the warrants on the mining stocks 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. Also, there are warrants trading on companies mining gold, silver, copper, zinc, cobalt, platinum, nickel and yes, even uranium. Options, LEAPS and Warrants are all very risky but provide investors with incredible leverage. If the underlying security does not exceed the exercise price by the expiration date, all of the above become worthless. Jun 6, 2005 Dudley Baker is the owner/editor of Precious Metals Warrants, a market data service which provides you with the details on all mining & energy companies with warrants trading on the U.S. and Canadian Exchanges. As new warrants are listed for trading they alert you via an e-mail blast. You are provided with links to the companies' websites, links to quotes and charts, tips for placing orders and much more. Precious Metals Warrants do not make any specific recommendations in their service. They do the work for you and provide you with the knowledge, trading tips and the confidence in placing your orders. For those investors seeking more knowledge on warrants do visit the Learning Center at Precious Metals Warrants, where you will find much more information and examples to enhance your learning experience. You may also sign up for The Warrant Report free weekly email. Disclaimer/Disclosure |
