The Chinese effect on Aussie miners...SMSFs, pay attention

Markets across the world sighed with relief after China released its inflation, though the highest in 34 months (at 5.5%), but markets were more hooked to its industrial production, which rose 13% - a show of structural strenght in the Chinese economy.

The take from it: the key numbers will be 7 and 6 for the Chinese authorities. The delicate balance of greater than 7% growth and less than 6% CPI.

Implications for Aussie miners: RIO and BHP will continue to benefit from the 7 and 6 percentages balance from China.

What are going for RIO and BHP apart from China?
1) Cash rich - both are expected to move to net cash postivie over the next 6 months
2) capacity for more capital management - US$3.3b from RIO and US$1b for BHP
3) Near term catalsyt - August results
4) At $80 and $43 respectively for RIO and BHP, they are low from valuation perspective in the medium term (with at least $100 and $50 being tauted for both stocks) 

OPTIONS STRATEGY

Options do not need to be taken advantage of by just traders or those who gear, but SMSFs and portfolio investors can benefit too. Strategy below can be used for SMSFs and portfolio investors if risk management procedure below is followed.

To buy shares:
Sell Rio Jul11 7801 put for $1.24 each contract

If assigned on 28 Jul expiry, purchase price of RIO is $78.01-$1.24 = $76.77
Be entitled to dividend of around 49c expected to go ex in mid Aug.

If not assigned, earned income of $124 for every 1 contract written or sold.

Risk: No downside protection.

Risk Management for SMSFs and non-gearing portfolio investors: Reserve $78,001 for 43 days for every 10 contracts sold/written. If not assigned, cash can be freed for other investments after 28 July.