BHP - Triangle forming..., page-4

Ascending/Symmetrical Triangle forming after downtrend... Possible reversal signal... Expecting breakout, but not sure which way it is going to go... favouring up...


Call Ratio Backspread.

Limited downside profit (breakeven in the following case), theoretically unlimited upside potential, and limited loss if price breakout fails to materialise.

Buy two BHPWN $9.49 CALL OPTIONS EXPIRING 19-Dec-2002 at 41c ea
Cost: 2 * (1053 * 00.41) = $863.46

Sell one BHP3E $8.78 CALL OPTION EXPIRING 19-Dec-2002 at 82c ea
Receive: 1 * (1053 * 00.82) = $863.46

Note strange numbers... BHP Options Specs adjusted after Steel spin-off.

Cost is zero, ignoring brokerage.

Maximum loss at expiry is $747.63 with BHP at $9.49... entire premium of $863.46 on the bought calls is lost, and the value of the sold call position equals the premium of $863.46 received less the position's intrinsic value of 1053 * (9.49 - 8.78) = $747.63.

EARLY EXIT is important if market is showing little movement by late November. Time decay is extreme with BHP around $9.50.

Time decay acts favourably on the short call with BHP below $8.78.

GK