short term play on FMG

by Raymond Chan 15 February 2011

Fortescue Metals Group FMG.ASX last trading at $6.88

A small outlay for a potentially strong upside.

1 We have seen iron ore prices rising back up to November 2008 levels. Analysts believe there are higher levels to come in the next 2 - 3 years, due to infrastructure contraints, rising demand and limitations on Indian exports

2 why FMG?

a. there's a gap of 8% price differentiation between iron ore prices and share price of FMG since beginning of 2011 - gap may close

b. FMG is due to report on 18 February, Friday. May be the catalyst to push it higher if result is as expected.

c. FMG is fully funded to ramp up production from around 40Mtpa now to the projected 155Mtpa

Options strategy for a short term, cash flow positive play on FMG, receiving 7c credit upfront (with about 8% of total put exposure for margining)

Options Strategy: Synthetic Long

Sell Mar $6.75 put and buy Mar $7.25 call for 7c credit

Looking for FMG to go beyond $7.25 to benefit from bought call, without outlaying cash now

To be aware:

1 this strategy does not have down side protection. Its a bullish play

2 for protection, exit position when share price falls to around $6.70 to breakeven on 7c received

3 Margins are required on the short put position. A full exposure for 1 contract is $6750, which is obligation to buy 1000 FMG at $6.756. At the start of this trade, margins required is about 8% of $6750 or $540 per contract (which can be funded by ldogement of eligible shares or cash).

Disclaimer

Information/strategies/trading ideas in this blog is provided for general information purposes only and is not intended as an offer to enter into any transaction. Information contained in this blog is not necessarily complete and its accuracy cannot be guaranteed. Information/strategies/trading ideas here have been prepared without consideration of the investment objectives, financial situation or particular needs of any individual investor. Before a client/investor/reader makes an investment decision, a client/investor/reader should, with or without RBS Morgans' or the author’s assistance, consider whether any advice contained in this blog is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any recommendation without first having spoken to your adviser for a personal recommendation. The use of options may not be suitable for all investors. Potential investors are recommended to seek professional advice before embarking on any strategies mentioned in this blog. The information/strategies/trading ideas contained in this blog have been taken from sources believed to be reliable. Neither the author nor RBS Morgans Limited represent that the information is accurate or complete nor should it be relied upon as such. Any opinions expressed reflect the author’s judgment at this date and are subject to change and is not necessarily that of RBS Morgans'. RBS Morgans and/or its affiliated companies may make markets in the securities discussed. Further, RBS Morgans and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this blog and may, as principal or agent, sell such securities. The Directors of RBS Morgans Limited and Grosvenor Sydney office advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client/investor/reader in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our representatives may be remunerated wholly or partly by way of commission. Information in this blog is proprietary to its author and may not be copied as your own or used for any other purpose without the prior written consent of the author. RBS Morgans Limited (ABN 49 010 669 726 AFSL 235410) A Participant of ASX Group Principal Office: Level 29, Riverside Centre, 123 Eagle Street, Brisbane QLD 4000
 

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