The shares of mining concern Rio Tinto (RIO) have been in a channel of higher highs and lows since early 2016. The equity notched a four-year peak of $59.66 on May 22, but has pulled back today after the company confirmed that it’s ready to sell its Grasberg mine stake to Indonesia’s Inalum for $3.5 billion. However, RIO’s pullback could be a buying opportunity, especially if a recent options signal is any indicator.
Although Rio Tinto shares have been flirting with multi-year highs, the stock’s near-term options remain attractively priced. Specifically, RIO’s Schaeffer’s Volatility Index (SVI) sits at 23.2%, at the very bottom of its annual range, indicating near-term options are pricing in relatively low volatility expectations.
Since 2008, there have been just three other times at which RIO stock was near a new high while simultaneously boasting an SVI in the bottom 20% of its annual range. The security was higher one month after all three of those signals, averaging a healthy gain of 10.39%, per data from Schaeffer’s Senior Quantitative Analyst Rocky White. At last check, RIO was down 2.5% to trade at $57.51; a similar 10.39% surge would put the shares just shy of $63.50 — territory not charted since 2011.
What’s more, should RIO extend its long-term journey higher, analysts could finally capitulate. Currently, 80% of the brokerage firms following the mining stock maintain tepid “hold” ratings, leaving the door wide open for potential upgrades to lure more buyers to the table.
Options traders looking to speculate on more short-term upside for RIO could consider the June 55 call, which is currently asked at $3.20. Buyers of the call will profit the higher the underlying shares rally north of $58.20 (strike plus premium paid) before the close on Friday, June 15, when the front-month options expire.