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How to use the POWR Options approach of combining 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 involves comparing recent performance to help identify relative underperformance in Strong Buy (A – Rated) stocks.
The expectation is that this relative underperformance will be short-lived and these A – Rated stocks will be relative outperformers over the coming weeks. Bullish calls are purchased on these temporarily discounted Strong Buy stocks to profit from the anticipated outperformance.
Technical and implied volatility analysis is employed as well in the decision-making process.
A quick walk through a recent trade in Rio Tinto (RIO) initiated on April 1 may help shine some light on the process.
Rio Tinto was a Strong Buy rated stock in the POWR ratings. Ranked number 1 out of 33 in the Industrial-Metals Industry. As good as it gets.
Yet RIO, a leading worldwide steel producer, had been dramatically underperforming the Steel Index over the past few months.
Indeed, this underperformance had reached an extreme, as seen in the six-month chart below. Rio Tinto was up just over 3% over the prior half year while SLX had gained almost 21% in that same time frame. The performance difference was now at 17.59%. This despite the fact that RIO is the largest component at just over 10% in the Steel Index.
RIO stock was finally showing some price action improvement on a technical basis on April 1. Shares had broken back above the 20-day moving average after hitting oversold readings.
Implied volatility (IV) was also very reasonable at just 13%. This means option prices were only cheaper than this 13% of the time in the past year.
POWR Options issued a trade recommendation on April1 to position for a pop in Rio Tinto. The actual trade was to buy the RIO 7/19/2024 $62.50 calls @ $5.00.
Fast forward to April 9 and the expected outperformance by RIO versus SLX had begun to transpire. Rio Tinto stock had risen about 3 points (5%). RIO stock had also closed the performance gap versus SLX from 17.59% to 12.20%.
POWR Options issued a close out on April 9 to sell the Rio calls at $6.70. The performance spread had converged, and RIO stock was getting overbought and running into overhead resistance on a technical basis.
9-day RSI neared the 70 level. Bollinger Percent B raced past 100. MACD hit a recent extreme. Shares were trading at a big premium to the 20-day moving average. RIO stock had trouble breaking past major resistance at $67 as we noted in the close out e-mail.
POWR Options bought the RIO calls on April 1 for $5.00. Closed out those calls on April 9 at $6.70 for a 34% gain. The holding period was 9 days. Not bad for a few weeks work.
RIO stock moved from $64 to $67 in that same 9-day period. A very respectable gain of just under 5%.
So, while the stock rose just under 5% the calls rose nearly 35%-or 7 times the amount of the stock. Highlights the powerful leverage that options can provide.
Not all trades work out this well-or this quickly. Trading is, after all, about probability and not certainty.
Those looking to increase the odds of success may want to take a closer look at POWR Options.
POWR Options
What To Do Next?
If you’re looking for the best options trades for today’s market, you should check out our latest presentation How to Trade Options with the POWR Ratings. Here we show you how to consistently find the top options trades, while minimizing risk.
If that appeals to you, and you want to learn more about this powerful new options strategy, then click below to get access to this timely investment presentation now:
How to Trade Options with the POWR Ratings
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, RIO has declined -7.71%, versus a 7.81% rise in the benchmark S&P 500 index during 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 makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His overriding passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of the POWR Options newsletter. Learn more about Tim’s background, along with links to his most recent articles.
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