Freeport-McMoRan (FCX) put volume spikes on buying

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Without any notable news from Freeport-McMoRan Copper & Gold Inc. (NYSE: FCX ) , shares of the company have gained more than 2% so far on the day. Puts due to expire in January 2011 were active during the morning session thanks to an investor who appears to have expressed bearishness on FCX.

Shares of the copper and gold name were trading up $1.43 to $68.09 as of 11:55 a.m. ET. FCX did not announce any news on Thursday, but HSBC downgraded the company to "neutral" on Tuesday. The stock is trading roughly 17% higher than its 52-week closing low of $58.18. Options action on the tape suggests at least one investor expects the stock to drop into the red during the next five months.

A large block totaling 10,000 January 2011 57.5 puts changed hands around 11:30 a.m. ET on Thursday. The options crossed for $3.90 per contract, which was the ask price at the time of the trade. Current open interest in this line is 534 contracts. This options action suggests the investor opened a big block of puts on a bet that FCX shares will drop at least 21% prior to January 2011 options expiration.


If FCX shares are still trading higher than the strike price at expiration, this put buyer will lose a maximum of the premium paid per contract. Total maximum loss on this bearish trade equals $3.9 million. If the stock is trading between the strike price and the breakeven level of $53.60, the investor takes back some of the debit paid.

Maximum gain on this trade occurs if FCX shares are trading below the breakeven level. The investor will make a maximum of $56.30 per contract in the unlikely event that the stock is trading at zero at expiration.

In order for the stock to drop at least 21%, the investor is not only betting on downside but also calling for volatility to increase during the near term. The January 2011 57.5 puts are currently trading with an implied volatility of 50% compared to the stock's 30-day historical volatility of 40%.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Options

Referenced Stocks: FCX

Karla Yeh

Karla Yeh

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