Gold futures were hammered again today, with the December
contract down more than 2%, or $30.10, to close at $1,338.40. As a
result, gold miners are getting punished as well, drumming up a
steady wave of speculation in the options pits. Along those lines,
Freeport McMoRan Copper & Gold Inc. (
) has seen put volume swell to nearly 32,000 contracts today,
nearly tripling the stock's average daily put volume. The most
active contract has been the November 95 put, where roughly 8,700
contracts have changed hands.
Despite the overall pessimism, a closer look at today's activity
reveals that some of FCX's put traders may have more bullish
designs. For instance, a block of 1,186 FCX November 95 puts traded
at the bid price of $1.09, or $109 per contract, on the Chicago
Board Options Exchange (
) at about 10:31 a.m. At the same time, a block of 1,186 FCX
November 85 puts crossed on the CBOE for the ask price of $0.19, or
$19 per contract. Given this data, it would appear that we are
looking at a short vertical put spread, more commonly known as a
, on Freeport McMoRan Copper & Gold Inc. This options strategy
is also known as a short put spread, or a bull put spread.
The Anatomy of a Freeport McMoRan Copper & Gold Inc.
Short Vertical Put Spread
Getting down to business, the trade breaks down like this: The
trader pays $22,534 for 1,186 November 85 puts -- ($0.19 * 100) *
1,186 = $22,534. Meanwhile, the trader receives a credit of
$129,274 for selling 1,186 November 95 puts -- ($1.09 * 100) *
1,186 = $129,274. As a result, the trader has pocketed a net credit
of $106,740 -- $129,274 - $22,534 = $106,740. The breakdown for
this credit spread is listed below:
Breakeven for this trade is equal to the sold strike minus the
credit received, or $94.10 -- $95 - $0.90 = $94.10. The maximum
gain is equal to the total premium received -- $106,740 -- while
the maximum loss is limited to the difference between the November
95 put and November 85 put, minus the net credit received, and is
reached if FCX trades at or below the purchased November 85 strike.
In this case, the maximum loss is $9.10, or $910 per pair of
contracts -- (95 - 85) - $0.90 = $9.10. Below is a chart for a
After the short vertical put spread has been established,
increasing implied volatility is pretty much neutral to the overall
position, as it lifts the value of both the sold option and the
purchased option. At the time of the trade, implieds for the
November 95 put arrived at 83.84%, while the implied volatility for
the November 85 put rested at 53.91%. FCX's one-month historical
volatility was 42.25%, as of the close of trading on Monday.
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