Trade Idea Update: Rio Tinto
Three days ago (22/02/23), we posted a Rio Tinto trade idea which aimed to provide short term protection against a bearish move in Rio Tinto due to worse than expected results.
Trade Idea 22/02/23
Protection from a downwards movement
Stock price: 6150p
+ Mar23 6000 Put for 120p
– Mar23 5700 Put for 50p
Net cost of 70p (£700 per 1 lot of 1000 shares)
Max Profit: £3,000
Max loss: £700
Number of days till option expiry: 25
At the time of writing Rio Tinto is trading at 5750p
If you wanted to the close the position, you could sell the Mar23 6000 put for 440p and buy back the Mar23 5700 put for 205p, crystallising a profit of 220% (£1650) in just three days.
Alternatively, you could sell the 6000 put for 440p to buy the 5900 put or 345p locking in £950 with a scope for maximum profit potential should the stock trade at 5700p or below on expiry in three weeks from today.
There are many other ways of managing this position. For example, if you think that RIO could trade lower than 5700p between now and the options’ expiry in three weeks, you could buy back the short Mar23 5700 put for 205p (£2050), effectively removing the cap and allowing for far greater upside. This strategy carries more risk because if the price of Rio were to spike upwards, the trade would become more expensive and the 6000 put could potentially lose all its value.
If you wanted to enter a fresh position today, you may consider buying the Mar23 5600 put and selling the Mar23 5300 put which will have the same upside potential as the idea above for a similar initial outlay.