Vale S.A. (VALE) is one of the world's largest global mining companies. It is also diversified. The world's leader in iron ore production also mines: nickel, copper, coal, bauxite, alumina, potassium and manganese.
Since January of 2011, VALE has taken a bearish journey. It is not hard to tie this downward progression to a weakened economy globally. The fourth quarter of last year as an example, saw it miss earnings estimates because of declining metal prices. Europe's problems and possible mild recession in 2012 are adding to lower prices in nickel and copper according to Rafael Weber who manages finances in Brazil for Futuro Corretora in Porto Alegre. He also stated that some customers stopped ordering and are just consuming inventory.
It has been three quarters in a row that iron ore and nickel producers have missed estimates. Europe's problems continue to sap the demand for the metals and when this happens, prices have to go down because the demand just is not there.
With ideas of a European recession looming in the mind of investors, the metals market may not recover early in 2012. VALE is still in a bearish downward move and we do not expect it to end in the next quarter. It just tried to push through its upper resistance but ended up bouncing back. Seeing an opportunity for a short term options trade here is what we recommend:
The Options Trade
With a lower support level just under 20, we think the stock will continue down before it bounces back up. Because of this, we would attempt to capitalize on a Bear Put Spread.
- Buy a September 2012 '23' put option (priced at $2.59)
- Sell a September 2012 '22' put option (priced at $2.11)
- Net debit to start: $0.44
- Maximum Profit: $0.56
Reasoning behind the Trade
We believe VALE will continue down for sometime this year. News of European recession looming and depressed metal prices will not change in the short term. VALE could move up again before it moves down because it does have a long term peak and valley type pattern. Therefore we are buying farther out into September to give ourselves some protection against time decay.