On the old blog last month, I wrote about the problem of quasi-hedging a micro cap stock such as Alloy Steel International (OTC BB: AYSI.OB). As I noted there, since Alloy Steel doesn’t have options traded on it, it’s impossible to hedge it against idiosyncratic, or company-specific risk. My main concern though isn’t company-specific risk but the exogenous risk of a drop-off in Chinese demand for iron ore, since Alloy Steel’s main clients today are iron ore miners (though its technology has applications in other kinds of mining and in infrastructure and energy production as well). The quasi-hedge I had in mind in that post last month was to buy puts on a particular Chinese steel company. I didn’t end up doing that, because the day I came up with the idea, the puts I was going to buy shot up in price 50% on news of that Chinese company’s dilutive secondary offering.
In hindsight, that idea was flawed anyway. What if demand for steel in China remained strong, but iron ore prices declined (perhaps because of previous, over-zealous stockpiling of it in China)? Conceivably, that could benefit the Chinese steel company and negatively impact Alloy Steel and its iron miner clients. So, a month later, I have come up with a much simpler idea: buying puts on AYSI’s biggest iron mining client, BHP Billiton. Today I bought a few of the $60 strike, AUG 10 puts on BHP: BHP100821P00060000, in the new options symbology.
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