Buy-Write BHP - Trade Review

April 2025 will go down as a highlight of maximum volatility and uncertainty in world markets. Trump Tarriff chaos injected fear into traders globally.

Thesis:

BHP had been a stock on my buy-list for some time. It's growing Copper portfolio, endless pits of cheap-to-mine Iron ore, upcoming Potash operation and the overall efficiency of capital which leads BHP to become the worlds largest listed mining company. It's ticking a lot of boxes.

In saying this, BHP has had negative share price pressure for some years, where the $40 level, which BHP had been stuck too could have been found back in 2021. Decreasing dividends, court cases, nickel mine closures and expensive exploration has been hurting BHP profits.

We know mining is cyclical, but now feels like a tipping point for BHP where it's investment in Copper and Potash, is starting to soon increase cash flow. Thats why BHP was a shortlisted stock and one to accumulate for the long term.

Trade:

April 2025 happens, BHP plummets to lows of $33.25. Implied Volatility skyrockets. I wanted BHP stock exposure, but wanted to protect any future downside, knowing that my trade entry would never be exactly at the bottom. I decided a Buy-Write strategy. heres the details:

Date: 7th April 2025
Bought BHP Stock @$34.74
Sold 17th July $38.01 Calls @$1.40

Why this trade?

Simply, I wanted BHP stock and I also wanted to reduce my downside risk. Options premiums were 40%+ for BHP, unheard of levels, double its normal IV. Buying Puts was out of the question, so was buying calls.

Selling Cash Secured Puts was attractive and a consideration - but I didnt want to miss out if the market rallied back up quickly, with the ever changing narritave with tarrifs.

Selling calls while the market is crashing seems counter-intuitive, but this is what I knew:

The Buy-write meant that my break-even price for this trade was $33.37 ($34.74 minus $1.40 of premium collected) about 4% protection to the downside.

I also knew, if the market rallied, there was a near certianty that Implied Volatility levels would fall very quickly, and the extrinsic value of my sold calls would drop, even though they're negative delta.

Fast Forward

Date: 17th April 2025
Bought 17th July $38.01 Calls @$1.30
BHP Price: $36.48

As we know, BHP rallied, and IV dropped. It dropped fast. Even though BHP rose $1.70 in 10 days, my short calls were 10c cheaper than what i sold them for because Implied Volatility on the Option went from 40% to 25%.

You made 10c on your call options, so what?

In hindsight, selling the call against my stock didnt provide enormous value. However, I had a 4% hedge on my purchased stock that didn't cost me anything. My break-even was cheaper than my purchase price and I felt more confident knowing I didn't have to pick the bottom. If BHP remained around $34 I'd be making money from time decay and if it fell further, I knew that I'd still be in profit until $33.37.

Would I do this again? Simply, Yes

I'm still in this position and hoping to capitalise on my future hopes for BHP to increase cash flows and dividends from it's soon to be operating mines.