This week’s covered call trade on BHP is a classic example of responding to the “here and now” and taking action, rather than being caught in the paralysis of fear.
Much has been made in the media of the “impending meltdown” in China and its impact on the Australian market, and in particular, the resources sector. A couple of weeks ago, I finished a tour with two good mates – with arguably the most opposite in outlooks – Harry Dent and John Thomas.
Whether you are a bull or a bear on China, the reality is that trading and investing is all about taking affirmative action, rather than having an opinion, but no position to potentially profit from it. Finding trades that then offer a reasonable risk and reward becomes the next stage.
The Chinese economy has slowed down from its previous gallop, to around 7% – a level it is forecast to remain at for the next couple years. One of the biggest dangers for traders is to focus on the number and not the context. Even with growth slowing to 7%, the reality is that demand for Iron ore on an absolute basis, is likely to remain at present levels, or indeed continue to grow, albeit at a diminishing rate. As such – where is the basis for the panic?
The doomsayers are also keen to point out the growing stock pile of iron ore. This can in part be attributed to seasonal factors including the Lunar New Year. Additionally, moves to reduce pollution through production facility upgrades may also be a factor in terms of a short term slowdown.
So why BHP?
Looking at the BHP covered call, support is at the current $35.50/$36.00 and increased options premium following a move up in the stock from its recent lulls, provide this kind of trade with an excellent technical basis.
A defined stop loss of $34.35, below the October lows, is softened by the 75c of call income. Sufficient risk/reward, based on our analysis. In fact pretty much 1:1 in terms of risk and return
Here’s the thing, each trade is binary – it may work out, and perhaps it may not – but either way, if you are a trader, you have to be able to expose yourself to the risk of the market, if you want the opportunity to make gains.
So to our 3 Reasons
- Have a view – ours is that BHP is coming off support, underpinned by strong and ongoing demand and relatively stable pricing for its exports – particularly iron ore. Selling pressure has eased off and momentum has switched to buyer driven.
- Have a stop/loss – If our view is wrong, we have a defined stop loss in place to protect our capital – $34.35
- We are selling an option that gives us some upside in the stock, but most importantly immediate income – 75c of income and 35c of capital gain
The question is, are you on the trade and if not, why not?
It may be that you don’t agree with our analysis or have a different view – in which case – no problem – the key thing is that you have a view! However, if you are not on this trade and don’t have a legitimate reason, why are you choosing to miss an opportunity?
It could be down to your lack of confidence – so let’s help you with that right now – click here to register for our FREE market basics program and start taking a positive step toward your trading career right now.