"BHP revisits the scene of the crime ..."

Back on January 23rd, we looked at the entry trigger for a BHP PUT trade and elected to wait until the price had cut below $44.23 just in case the market decided to run back up and fill the gap on the upside.

This is in fact what happened and as at 28th January, the price had still not broken below the lower regression channel or the lower support level of $44.23.

We live in hope of a near term support break through.

Cheers

"my open pit runeth over ..."

Finally, after about three days the penny seems to have dropped with the global markets that the floods in Australia will be very damaging to BHP and it various mining interests. Last week I looked to enter a long PUT one strike OTM. The actual trigger was to wait until BHP had broken below the support of $44.62. [A]

As the market began to consolidate at this point, which was also highlighted by the ellipse target, I decided to wait for a clearer signal. Luckily I stayed out, and the price of BHP went up based on the news of China's economic growth figures. This was short lived, as the market was reminded of the Australian flood damage, and as of Friday the price of BHP had gapped down materially, but not sufficient to pass the previous support level at $44.25 [B]

The plan now is to enter a $43.50 PUT once the the price had cut below the support at [B] $44.25 just in case the market decides to run back up and fill the recent gap before returning to the medium term wave 3 target low of $41.90 [C]. Prior to entering the $43.50 PUT I will also make sure the Delta is between 25 to 35 to get the maximum leverage in the growth of the OTM PUT price.

Cheers

"droughts, floods & a drop in profits ..."

BHP is a key supplier in the commodities business especially for coal, coking coal, alumina & steel, and with the floods in Australia being the combined size of Germany & France, many of the mines are flooded, rail heads are under around 20 feet of water, roads are blocked and the expectation is that supply will be interrupted for well over six months before infrastructure can be rebuilt and replaced etc. 

China & India are key customers of Australia and of BHP with respect to coking coal so the impacts are likely to have a global impact on the pricing of manufactured goods out of these countries as well.

In addition, Queensland is where the floods are, and it is a major food growing area and exporter as well and prices are expected to increase between 30-50% due to the wide spread devastation of crops so industries involved in this space will also have significant downward pressure on their P&L as well.

In the attached BHP price chart from today, (6th January 2011), price has broken out of the regression channel, passed below the 6,4 exponential DMA and looks to be heading south along with BHP's near term profits. Added to this, the 10,70 Elliott Oscillator which tracks institutional support, is declining and without the larger fund and corporate support, BHP's price has a higher probability of weakening.

Today price touched the ellipse support and retraced, this could be a momentary test or an interim support point, so I am waiting for price to cut below $44.68 before entering. The trade has a good risk reward profile with an expectation of around 2.5:1 (250% ROI), by the time it hits the MOB target at $41.86. Currently the $44 PUT options have a Delta around 35 which is the sweet spot on the delta curve where options offer the cheapest purchase price and have the fastest potential gain up the Delta curve as price moves. 

 

Cheers