OPTIONS TALK: Bluescope Steel to Double Top?
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July 13, 2007
Is the resource boom finished in the Australian market? The press is full of stories saying strong Chinese demand for raw materials will drive the prices of commodities up forever! Can we believe it? As a seasoned trader I let the chart tell the story.
Chart 1 shows a weekly chart with some interesting price analysis. The arrow labeled “1” on the chart is the reference range used for price forecasting. This range is $2.68 ($8.83 – $6.15). It can be seen that this range has worked throughout the full history of BSL. This will become an important number on BSL going forward. Chart 1 also highlights the longstanding principle in which “Previous Resistance becomes Future Support”. The coloured circles illustrate this point. Projecting the $2.68 reference range from the current low price of $10.05 gives a future price target of $12.72, which comes in as a double top from the previous top of $12.65.
Chart 1 – BSL Weekly Bar Chart
The Daily chart shows a remarkably similar picture. Chart 2 shows that BSL has a similar reference range currently working. The arrow labeled “1” shows a price range of $2.57 ($8.82 - $6.25). Taking this range from the current low of $10.05 gives a price target of $12.62, which is very close to the weekly price target of $12.72. The past six weeks has also seen BSL pull back to hold above a previous resistance level, which could now become support. This is a bullish sign.
Chart 2 – BSL Daily Bar Chart
An advanced tactic here would be an in-the-money (ITM) Put Calendar spread. Chart 3 illustrates the trade using Sep07 12.50 and Dec07 12.50 put options. This can be placed for a debit of $135 ($0.135 * 1000) per contract with a potential profit of $585. The only thing to keep an eye on is the time value in the short options. The current value is $0.175 (1.665 – (12.50 – 11.01)). Any time value above $0.10 should be safe for assignment purposes.
This trade will work out well if the front month expires near $12.50 and a double top forms. If BSL then starts to fall away, the Dec07 12.50 puts could come into play.
Chart 3 – BSL ITM Put Calendar Risk Graph
click here for more detail
Manage Your Risk!
Oscar Lee
Trading Tutors
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