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Today we are applying a Bull Call spread on Rio Tinto Limited (RIO) which is breaking out of a triangle pattern.

Analysis:

RIO is currently trading at $72.78

Rio looks oversold at this stage following a fall from both its recent report and going ex-dividend. It has stalled around the key $72.50 level and showed reluctance to fall further. RIO is also still trading in a longer term uptrend which comes in roughly where it has recently stalled. Today’s entry is a Morning Star reversal pattern adding further credence to a rise from here.

To take advantage of this, we could look at entering a Bull Call spread where we can profit from both bullish and side-wards movement. At this stage time decay is more neutral, and the true benefit is having the flexibility to wait for the bullish move to occur, just in case it decides to consolidate before moving higher. Though as RIO tracks side-wards, the less bullish move we need in order to profit.

The strategy:

There are many different types of options strategy’s used in different market conditions.  But the key reasons traders use this style of trading is that:

  • Benefits from a rising market. Can be used as a short term trade as the stock doesn’t need to move up much to make a profit.
  • Time decay can positively affect the trade
  • Is used by directional traders that want a trade they can get out of quickly but gives the benefit of being able to wait for the move.

With some options strategies time decay works against you, so not only do you need to get the directional movement right but the timing has to be perfect. With this strategy you get a generous profit if you get the move right with flexibility on the timing.