VALE – Vale S.A. – Shares of the world’s largest iron-ore producer are lower by 1.80% to $27.05 in late-afternoon trading, but optimistic options traders expecting rosier circumstances by next year looked ahead to the January 2011 contract to establish bullish stances on the stock. Perhaps optimism on Vale was inspired by Banco BTG Pactual SA’s upgrade of the firm to ‘buy’ from ‘neutral’ on sentiment iron-ore prices could double in the second quarter versus the fourth quarter. It looks like investors purchased roughly 7,000 calls at the January 2011 $40 strike for an average premium of $0.47 per contract. Call buyers make money if, by expiration, shares of the iron-ore producer are up 49.6% to exceed the average breakeven price of $40.47. Investors may also turn a profit even if shares do not exceed $40.47 because lesser rallies in Vale’s value per share may boost premium on the January 2011 $40 strike calls to a facilitate a profitable closing sale of the contracts ahead of expiration.
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Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.
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