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Top Trades for Tue, 25 May 2021 10:47 – X and RIO

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Top Trades for Tue, 25 May 2021 10:47 – X and RIO
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Carnegie's US Steel (X) has risen to $24.32 from below $10 last year but it's only a $6.5Bn market cap.  In a good year, US Steel can make $2Bn and 2021 should be a good year but steel plants are expensive to operate and, in a bad year, they can lose $1Bn – that's why they are called cyclicals but investors these days have no patience for cycles.  X made $350M in Q1 and should do better as the year rolls on.   I don't like chasing them but we can sell the 2023 $17 puts for $3.50, which nets us in for $13.50 and we'd love to own them down there so:

In our Earnings Portfolio, which has too much cash, let's make the following trade:  

  • Sell 10 X 2023 $17 puts for $3.50 ($3,500) 
  • Buy 20 2023 $20 calls for $9.50 ($19,000)
  • Sell 20 2023 $30 calls for $6.20 ($12,400) 

That's net $3,100 on the $20,000 spread that's $8,000 in the money to start and the upside potential is $16.900 (545%) if X is over $30 for us and that's the top of their rising channel so we'll also probably make a bit of income selling short calls at some point along the way.  

That is how you stay ahead of inflation, with trade ideas that return 545% on cash!  Our worst-case scenario is 1,000 shares of X are assigned to us at $17 ($17,000) plus whatever we lose on the spread, though the net of the spread is $6,600 so, as long as we stop it out with $3,100 or more, we net into X for $17, which is 30% below the current price.   That's another great way to make sure you profit in the markets – never buy stocks for full price!  

Rio Tinto (RIO) is another nice inlation hedge and we already sold 5 2023 $69.07 puts for $7 in our Long-Term Portfolio and now they are $7.50.  At $85.70, RIO's market cap is $137Bn and they are not even projecting copper will stay over $3/lb (it's $4.50 now) in their forecasts but they are still going to make over $15Bn this year and next.  Copper demand is much more predictable than Steel so we love RIO down here and we'll expand our trade this way:

In the Long-Term Portfolio (LTP), let's

  • Sell 5 more 2023 $69.07 puts for $7.50 to average 10 short at $7,250.
  • Buy 15 2023 $69.07 calls for $18 ($27,000)
  • Sell 15 2023 $89.07 calls for $9 ($13,500) 

That's net $6,250 on the $30,000 spread so we have $23,750 (380%) upside potential over $89.07 and we're at $85.69 now – so we're not asking for a lot of gains.  Worst case is owning 1,000 shares of RIO at $69.07 and again, since we're net $6,250 in on the spread, if we stop out our $13,500 spread before it falls below $6,250, then our worst-case is simply owning 1,000 shares of RIO at $16.63 (20%) below the current price.  Notice how great the support looks at the $75 line – I'm not worried.  

We have a LOT of cash in our Member portfolios and we'll be looking for bargains like these as earnings season winds down.  We're also remaining very well-hedged, just in case but we're through earnings and starting the summer and, so far, no major catastrophes – so let's enjoy it while it lasts.