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Options Trade Alert on Rio Tinto

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Strategic Mindset: Market neutral with possibilities of surges in volatility.

Target: Rio Tinto (RIO) trading at $53.99.

Commit Criteria: RIO implied volatility is overpriced relative to its forecast volatility of 4.58% over the time frame of this trade. We are looking for possible price movement but for it to stay within its $50 to $57.50 price range until the exit of this trade. This is a slightly more aggressive in the Top Gun Options Advanced Model Portfolio due to the strikes we needed to use.

Tactic: Opening 20 RIO May 2012 Iron Condors (strikes 47.5/50/57.5/60 ) for a $0.58 credit

Tactical Employment of Iron Condor:

  • Buying to Open 20 RIO May 2012 $60 Calls
  • Selling to Open 20 RIO May 2012 $57.50 Calls
  • Selling to Open 20 RIO May 2012 $50 Puts
  • Buying to Open 20 RIO May 2012 $47.50 Puts
  • Net Credit: $58 per Iron Condor for a total of $1160.00
  • Max Gain: $1160
  • Max Risk: -$192 per Iron Condor for a total risk of -$3840
  • Mid-Course Guidance: We will be watching for a price movement near the short strikes. If the short strikes are threatened we will adjust the Iron Condor as necessary.

    We don't want trade expectancy dropping below 2%. Based on this, we have two price targets at which we need to consider an adjustment. RIO trading below $50.51 and above $56.47 are triggers for an adjustment in our Advanced Model Portfolio.

    Profitability Target:

    We will wait for this Iron Condor to expire worthless taking the $1160 credit as profit.

    Exit Tactic: We will wait for this Iron Condor to expire worthless, adjusting as necessary.

    Matthew "Whiz" Buckley is the Founder and CEO of Top Gun Options, an exclusive provider of options training and practical trading applications for options traders of all skill levels. He is also the founder of Strike Fighter Financial LLC, a business-consulting firm specializing in leadership development, risk management and strategic planning for Fortune 500 companies and related organizations. He's also a Managing Partner and Chief Financial Strategist at Wealth Creation Investing. Buckley flew the F/A-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings and flew 44 combat sorties over southern Iraq. After leaving active duty, he served as a Managing Director at a Wall Street volatility arbitrage options firm and was a founder and the CEO of a financial media company. He is an internationally recognized speaker and combined his experiences in the military and corporate America in his first book "From Sea Level to C Level."

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