"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