Lets keep swinging through earnings.

A hot commodity, upcoming spinoff to unlock value and a good technical setup combine to present a juicy swing trade opportunity in VALE

On March 16 , we published a swing trade opportunity in Antero Resources. This was a combination of technical setup, oversold condition in NatGas market. We were directionally right on both counts but we also had help from unexpected Opec cuts that put some spring in the energy markets. Lets take a look at the trade on the date we put it out and today

The trade on March 16 was to sell 22strike puts for a $1 credit for the March 31 expiration. And to do a call debit spread on AR for July 21st expiration 24/27 call debit spread for a $1 debit.

Those puts expired worthless and we kept the entire $1 credit. The CDS is essentially free and can be closed immediately for $1.15. We still think AR has room to run we are going to hold on to the CDS.

In our experience, we do better with swing trades when we wait for a good situation with a great risk / reward setup. Today we are going to showcase another setup that looks interesting.

From Barchart.com, “Vale S.A., being one of the world's largest mining companies, produces iron ore, iron ore pellets, nickel, manganese ore, ferroalloys, metallurgical & thermal coal, copper, platinum group metals, gold, silver & cobalt. Vale has a logistics network integrating mines, railroads, ports & ships”

Iron Ore is still the largest business in the company and is a slower growing business than the rest of the company. For a long time Vale has considered selling the base metals units But rather than selling all or part of it, the company is now looking to separate and ring-fence the copper and nickel units from the iron ore business as the two have different growth prospects. As part of this, they are looking to sell a 10% stake to a strategic partner looking to raise around $2.5b. There is significant interest already from a dozen potential bidders. During the Investor Day, Vale said it was in advanced talks with potential “high profile” partners, those with “deep EV transition experience,” and looked to finalize a deal by the first half of 2023. Firming copper and nickel prices along with the upcoming opportunity to unlock the value by separating the fast-growing base metals business are one of the reasons for us to look for a bullish risk reversal trade.

We also have been seeing a lot of call debit spread trade flows coming in for EWZ ETF. VALE is one of the biggest holdings in EWZ ETF.

Our trade that we both have in our accounts is short 15P in the September monthly expiration cycle. Along with this short 15P we have Jan 2024 20C leaps. We are selling more Put contracts than the number of long calls we have.

We got a $1.05 credit for the short 15P and paid $0.67 for Jan 2024 20C

For example, we have 2 short puts for a credit of $2.1 for almost $2800 margin and 1 long call for a $0.67 debit.

The logic behind this trade is that we do not mind getting long this stock at $14. And by buying Jan 2024 calls we are giving ourselves more time for the long thesis to play out.

The way we are planning to manage our risk in this trade is as follows: If VALE challenges the low of 14.98 made on 4/6/2023 then we will close half of our short put position for a small loss. We will then add short 14P instead. The expiration will depend on when this breach of 14.98 happens. If we have a couple of months left for September then we will still go to the September cycle to sell the 14P otherwise we will go to Jan 2024 to sell the 14P.

What happens to the Long 20C if we go below 14.98? Of course that will also be at a loss. So, we would roll down the strike to 17C in Jan 2024.

Now how will we be handling when VALE goes higher? For any credit trade, we take profits at 50% of the credit received. For example, if VALE goes to 17 or so, we should be able to close the short 15P by buying back the put for 0.50 or less. The reason for doing this is that we can release the margin tied in this trade for some other trade.

Also, if VALE is at 17 then our Jan 2024 20C would probably be double too. If we think that there is more upside then we will sell 22C against or long 20C to make it a long diagonal and take profits and take out all our initial cost in the trade.

We will then have a free diagonal.

Who does not like free trade?

As always these are trade ideas that we are sharing. You will need to do your own due diligence before entering into a trade. You can follow us on Twitter for updates on this and other trades. @monetivewealth @archna2011