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Trade Of The Week: Long Call on Fortescue Metals Group (FMG)

December 16, 2020

Trade Of The Week: Long Call on Fortescue Metals Group (FMG)

Iron ore has been a hot topic in the markets throughout December with futures prices surging towards the US$160 level. Demand has risen from increased government spending on infrastructure while supply has fallen globally.

Iron ore has been a hot topic in the markets throughout December with futures prices surging towards the US$160 level. Demand has risen from increased government spending on infrastructure while supply has fallen globally.

 

Source: TradingView

Rio Tinto, Vale, BHP Group and Fortescue Metals Group are the 4 largest producers of iron ore worldwide. Three out of four of these companies are Australian listed companies. Brazil’s Vale continues lowering their production guidance as the fallout from the collapsed Brumadinho dam continues.

China’s Iron and Steel Association recently asked authorities to investigate iron ore’s recent price surge, which has led to a pullback in the futures price since the 14th of December, and a pullback in RIO, BHP and FMG.

However the underlying supply and demand imbalance has not been resolved so these investigations should only have a minor effect on the short to mid term pricing of iron ore. The world is currently demanding more iron ore than can be produced.

This puts the Australian-Chinese trade war in an interesting position. China is not going to apply tariffs on an imported commodity when there is no viable substitute to Australian production (China imports 60% of its iron ore from Australia). China is reliant on Australian iron ore, and Australia has no interest in lowering the market price of iron ore.

For this reason, over the mid term we should take advantage of any short term pullback in the market price of our big iron ore mining stocks (RIO, BHP, FMG).

 

 

Seeing we expect the market to recover from it’s recent pullback, we will enter a long call position on FMG:

 

 

We will set the expiry date to the 21st of January 2021. We can consider closing the position when the stock starts to experience resistance either at or above the recent highs of $23.29. We will aim to close the position before the end of 2020 in order to reduce time decay as we are looking for a quick rebound here.

If you would like some more information on options trading strategies, call 1300 805 795.

 

You can also follow this link for a detailed tour of the Implied Volatility platform.  

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform

 

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795. Please note, we provide General Advice only. 

Past performance is not a reliable indicator of future performance. The opinions expressed in this article are our personal views. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

 


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