This is a continuation of a theme I have been writing about this year involving stock options referred to as naked puts.
This allows investors to take a position in a stock, most often below its current price, but depending on market sentiment. That sentiment remains relatively negative so the spreads are attractive.
I have been following BHP Billiton Ltd ADR (NYSE: BHP) the largest mining company in the world, with headquarters in Australia, for a while but I do not own the stock today. I view all mining companies as an opportunity because I think the diversified raw materials they control are the best hedge against inflation. I do not think inflation is imminent, but with the extreme increases in money supply and debt being created I do not think it will be avoidable a few years out.
I would rather own these companies than speculate on gold prices (although they own that too). I already own Anglo American (NASDAQ: AAUK), which has been in the news a lot lately regarding mergers and acquisitions, and it was one of my recommendations for 2009 up 51.53% to date.
IF you bought BHP last November, you would have doubled your money, but at the time most of us were thinking about our liquidity, which is one of the reasons for the sell off in stocks.
BHP closed yesterday at $55.40. When I sold naked puts at a February 2010 strike price of $52.50 for a large premium of $8.41, or 16%, paid to me on the spot. Therefore my break-even is $44.09, if it gets put to me because the market is worse next year.
I would emphasize again that this trade is not recommended if you would not be happy to own the stock at the break-even price. Of course if the stock trades higher, you just keep the cash with no obligation, and in this case it's a lot of cash.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of AAUK and options in BHP.
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