BHP Billiton Ltd. (NYSE: BHP) shares are trading higher today after a Peruvian mining strike called Monday by Peru's National Federation of Mining, Metallurgy and Steel Workers failed to draw large numbers of workers. Operations at BHP's Tintaya mine in Peru were normal on Monday, according to company officials. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on BHP.This stock has risen steadily over the past year, hitting a one-year high of $87.43 in October. BHP opened this morning at $82.33. So far today the stock has hit a low of $82.32 and a high of $83.35. As of 10:55, BHP is trading at $82.57, up $2.99 (3.8%). The chart for BHP looks bullish and steady, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
For a bullish hedged play on this stock, I would consider a January bull-put credit spread below the $60 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 5.3% return in just 3 months as long as BHP is above $60 at January expiration. BHP Billiton would have to fall by more than 27% before we would start to lose money.
BHP hasn't been below $60 since August and has shown support around $79 recently. This trade could be risky if the worldwide economy starts to slow down and demand for metals decreases, but even if that happens, this position could be protected by strong support it has formed just above $60 about three months ago, plus the stock's 200 day moving average, which is currently around $59 and rising.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: At publication time, Brent neither owns nor controls positions in BHP.
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