Option Trade
BHP Billiton Limited (ADR) (NYSE:BHP) Puts 
Thursday, July 30, 2015

**OPTION TRADE: Buy the BHP Sep 2015 35.000 put (BHP150918P00035000) at approximately $1.15. Place a protective stop loss at $0.45, and a pre-determined sell at $2.00.

by Ian Harvey

July 30, 2015

BHP Billiton Limited (ADR) (NYSE: BHP), an Australia-based mining company having interests in diversified natural resources, have had most analysts wash their hands of the company, with two-thirds sporting "hold" or worse ratings. Recently, in fact, Canaccord Genuity cut its price target on the equity to 1,380P from 1,670P.

Shares of BHP Billiton Limited have earned a consensus recommendation of “Hold” from the seven brokerages that are currently covering the company. One investment analyst has rated the stock with a sell recommendation, four have assigned a hold recommendation and two have issued a buy recommendation on the company. The average 1-year price target among brokerages that have covered the stock in the last year is A$41.90 ($30.58).

Many are very concerned that what Australia is currently experiencing is a credit-fuelled property bubble set against the backdrop of a collapsed mining sector.

Record low interest rates as well as foreign buyers have fuelled the bubble.

Property issues aside, then there's the commodities market. With Australia at the end of a 24-year growth cycle, some investors believe recession is inevitable given the cyclical nature of economies.

In fact, it is also generally accepted that commodity collapses predate recessions.

Lay-offs and redundancies are now common in the mining industry - the bottom has fallen out of the iron ore market, for example.

Mining giants like BHP Billiton and Rio Tinto have basically completed their expansion plans and are seeking redundancies in a bid to lower costs in response to lower prices.

The same dynamic is at work in the coal industry and now there are question marks over whether big projects in the Galilee Basin in Queensland.

The downturn in the global commodity cycle is continuing to hit Australia's economy, exacerbating the long-anticipated decline in resource-related investment.

Exporters of commodities (Australia, Indonesia, Malaysia, New Zealand) will see a drop in foreign earnings and a drag on growth, although currency depreciation will offer some cushion.

The other main area to consider is historically, mining magnate BHP has been a disappointment in August, positive just 20% of the time in the past decade, and averaging a one-month loss of 2% -- including a 3.5% drop last August. Of course, the shares haven't been any better in 2015, down about 20% at $37.71, and just off their recent multi-year lows in the $36 region.

Should history repeat itself, BHP call buyers could find themselves heading to the hills, potentially exacerbating selling pressure. Over the last 10 weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has amassed a call/put volume ratio of 2.71 -- in the 98th percentile of its annual range.

The Harvey’s Options Volatility Indicator certainly backs up the situation that is unfolding.

Therefore, based on the facts above, the following option trade is recommended…..

**OPTION TRADE: Buy the BHP Sep 2015 35.000 put (BHP150918P00035000) at approximately $1.15. Place a protective stop loss at $0.45, and a pre-determined sell at $2.00.

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