Today we are applying a BHP Billiton Limited (BHP)
Analysis:
BHP is currently trading at $31.80
BHP has recently come back to the uptrend line as shown in the below chart. Today it has had a strong rise, breaking the countertrend and therefore the pennant triangle pattern.
From a medium-term perspective, BHP has been trading in a channel since roughly April, with key support at roughly $31. Today’s bullish move indicates it is bouncing off the bottom of the channel.
We would suggest a Bull call spread to trade this but ratioed to have half as many sold Calls to bought Calls. This will result in the trade being time decay negative rather than positive if we were to just do a normal Bull Call spread. The advantage is that the trade will be more directional, meaning we can make a greater profit with less movement, and the sold Calls will merely act as a small hedge and help alleviate time decay rather than turn it positive.
This is a rather advanced strategy, but it simply means we are strongly directional driven, with a small hedge in place.
The reason we are more directionally oriented is because BHP at these levels when it gives signs it is ready to rally, usually has a strong run up very quickly. We don’t really need to be time decay positive as we don’t expect to be in this trade for long. The reason for the small hedge is because BHP can gap down hard and fast, and the hedge will take some of the sting out of those situations.
If you would like to learn how and when to use this strategy, and other strategies like it, then please contact us here at TradersCircle on 03 8080 5788. Alternately, you can download a free eBook off our website which runs through advanced strategies.