Trade of the Week
RIO (ASX:RIO) – Bear Call Spread Option Strategy
This week we took an early profit on a RIO bear call spread, 14 days prior to options expiration. The trade was entered on 11th Sept as a pair of spreads, namely a bull put on BHP, and the abovementioned bear call spread on RIO, which together provide us with a limited risk (hedged) short option premium exposure to the Iron Ore Miners.
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Since the 11th Sept, RIO has declined from $64.15 to as low as $59.48, roughly 7.3%, conforming ideally to the trades bearish exposure. With this decline, we have been presented the opportunity today to buy back the spread for 10c, locking in 76.5c out of a maximum 86.5c profit on the trade.
Over the same time period, BHP (ASX:BHP) has decline by 6%, which is in line with our original expectations that BHP would perform better than RIO since entering the trade. This being said, we are now holding a bullish spread on BHP, with max profit generated from BHP rising above $36 by the end of the month. Taking into account the profit that is now realised on RIO, our total credits on this trade are $1.295, with a $2 spread currently open on BHP. This means that at expiry, our breakeven level for the remaining BHP spread is $34.705, just below today’s close (9th Oct).
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Our view on the Iron Ore stocks has become more bullish this week, hence the reason we are taking profits on this RIO trade, whilst also adding new bullish exposure on RIO via Tuesday’s Covered Call trade recommendation.