Four ways to trade Rio Tinto plc (RIO)

In this article we will look at four strategies using our tools of the trade, options and puts, to trade RIO and possibly buy the stock below market price.  Rio Tinto plc (RIO)  is  a mining company with almost half of the revenues derived from Iron ore and around a quarter of revenues from gold, but also mines and process several other metals and minerals. RIO has an operating cash flow over $19 billion and pays a dividend of $1.07.  RIO currently earns $8.16 per share, has an average price target of $92 and currently trading for half that price.

Covered call option:  This is the most basic and safest strategy for an options trader. You simply buy the stock and sell later dated options, at the strike price, you are happy to sell the stock. While RIO is trading today at $47.40, options for January, 2013 $60 strike price can be sold for $4.50. So, using this strategy, one can buy the stock for roughly 10% below market price and still have a chance for $17.10 in upside. Also, earn a $1.07 in dividend.

Covered call option and option spread combo: In this strategy you buy the stock and open, a one by two credit spread. RIO January, 2013 $50 strike price option is trading for $8.50 and $60 strike price option is trading for $4.50. So following this strategy, for every 100 stock bought, you buy 1 contract of $50 strike price and sell 2 contracts of $60 strike price option, getting a credit of $0.50. You not only bought this stock for $0.50 below market price, but also have a chance to gain $2 for every $1 increase in stock price, up to $60.

Selling a put option: While waiting for the stock to fall to the predetermined price, you may generate revenue by selling put options at that strike price. So if you want to buy RIO for $40, you can sell April, 2012 $40 puts for $3.  Sell 1 contract for every 100 stock you want to buy. If the stock doesn't fall to $40, by April, 2012, you have made $3 in profit. If the stock dips to $40 or below, you are obligated to buy the stock and our buying price is $37.

Put and put spread combo: In this strategy, you buy one put at the money and sell two puts out of money. RIO April 2012, $45 strike price puts are trading for $4.60 while $40 puts are trading for $3. So, for every 1 contract of $45 puts bought, sell 2 contracts of $40 puts and you get a credit of $140. If stock falls to $40 by April, you made a profit of another $500. If stock falls below $40, you are obligated to buy the stock for $35, no matter how much the stock dips below $40. If the stock continues to climb higher from today, this trade can still be closed for profit before expiration, because with time, $40 puts deteriorate faster than $45 puts.

  This article is just a starting point. Do your due diligence before investing and according to your risk tolerance.

Source: Yahoo Finance

Disclosure: I do not own any position in RIO, but might initiate in the next 72 hours