How to use the POWR Options approach to combine fundamental, technical and implied volatility analysis with a recent RIO trade as an example.
One of the screens we use in the POWR options trade selection process is to compare recent performance to determine the relative underperformance of Strong Buy (A-rated) stocks.
This relative underperformance is expected to be short-lived and these A-rated stocks will be relative outperformers in the coming weeks. Bullish calls are purchased on these temporarily discounted Strong Buy stocks to capitalize on expected outperformance.
Technical and implied volatility analysis is also used in the decision-making process.
A quick look at a recent trade in Rio Tinto (RIO) initiated on April 1 might help shed some light on the process.
Rio Tinto was a Strong Buy stock on POWR Ratings. Ranked #1 of 33 in the Industrial Metals Industry. It doesn’t get any better.
Nevertheless, RIO, a leading global steel producer, has significantly underperformed the steel index in recent months.
In fact, this underperformance had reached an extreme, as can be seen in the six-month chart below. Rio Tinto gained just over 3% compared to the previous half, while SLX gained almost 21% over the same period. The performance difference was now 17.59%. This is despite the fact that RIO is the largest component in the steel index at just over 10%.
On April 1, RIO stock finally showed some improvement in price action on a technical basis. Shares had broken back above the 20-day moving average after reaching oversold levels.
The implied volatility (IV) was also very reasonable at just 13%. This means that option prices were only cheaper 13% of the time last year.
POWR Options issued a trading recommendation on April 1 to position for a pop in Rio Tinto. The actual trade was to purchase the 7/19/2024 $62.50 RIO calls at $5.00.
Fast forward to April 9th and RIO’s expected outperformance over SLX began to emerge. Rio Tinto shares were up about 3 points (5%). The RIO share was also able to close the performance gap compared to SLX from 17.59% to 12.20%.
POWR Options issued a close to sell the Rio calls at $6.70 on April 9th. The performance range had converged and RIO stock became overbought and encountered overhead resistance on a technical basis.
The 9-day RSI approached the 70 mark. Bollinger Percent B raced above 100. MACD recently reached an extreme. Shares were trading at a wide premium to the 20-day moving average. As we noted in the closing email, RIO stock struggled to break through major resistance at $67.
POWR Options purchased the RIO calls on April 1 for $5.00. These calls closed on April 9 at $6.70, representing a 34% gain. The holding period was 9 days. Not bad for a few weeks of work.
RIO stock rose from $64 to $67 in the same 9-day period. A very respectable increase of almost 5%.
So while the stock rose almost 5%, calls rose almost 35% – or seven times the stock’s value. Highlights the powerful leverage that options can provide.
Not all trades work as well – or as quickly. After all, trading is about probability and not certainty.
If you want to increase your chances of success, you should take a closer look at the POWR options.
POWR Options
What do you do next?
If you’re looking for the best options trades for today’s market, be sure to check out our latest presentation, “How to Trade Options with the POWR Ratings.” Here we will show you how to always find the best options trades while minimizing risk.
If this appeals to you and you would like to learn more about this powerful new options strategy, click below to gain access to this latest investment presentation now:
How to Trade Options with POWR Reviews
All the best!
Tim Biggam
Editor, POWR Options Newsletter
RIO shares closed at $65.99 on Friday, down -$0.28 (-0.42%). Year-to-date, the RIO is down -7.71%, while the benchmark S&P 500 index is up 7.81% over the same period.
About the author: Tim Biggam
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim, and 3 years as a Market Maker for First Options in Chicago. He appears regularly on Bloomberg TV and is a weekly contributor to TD Ameritrade Network’s Morning Trade Live. His greatest passion is making the complex world of options more understandable and therefore more useful for everyday traders. Tim is the editor of the POWR Options newsletter. Learn more about Tim’s background and links to his latest articles.
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