Shares of Freeport-McMoRan Inc (NYSE: FCX ) passed Monday's critical support test with flying colors. The volatile, go-to stock for traders seeking copper exposure soared just shy of 8% on monster volume. Yesterday's moonshot is providing a good excuse to take a renewed look at FCX to see what type of opportunities lurk in the options market.
It's worth noting that Freeport-McMoRan issued a press release yesterday after the close announcing the sale of its Deepwater Gulf of Mexico properties to Andarko Petroleum Corporation (NYSE: APC ). News of the sale - or perhaps the overnight swoon in equities across the board - delivered a sizable down-gap for FCX stock this morning.
Actually, yesterday's gains have been cut in half at the time of this writing.
Since losing its momentum in May, shares of FCX have dithered in a sizable trading range. The $10 support level has been tested multiple times, but has yet to give way. The months of meandering have been sufficient in neutralizing Freeport-McMoRan's long-term trend (the 200-day moving average is now flat).
More upside is needed, however, before buyers have fully wrested control.
The FCX Trade
If you think the uninspiring action in FCX stock continues, consider selling out-of-the-money options in both directions. That is, sell the Oct $9 put as well as the Oct $12 call for a net credit of 45 cents. The short strangle trade is poised to profit if FCX stock remains between $8.55 and $12.45 by October expiration. The max reward is limited to the initial 45 cents while the max risk is theoretically unlimited.
To cap the loss, you might exit the trade if the stock pops above $13 or tumbles below $8. The estimated loss is around $100.
With naked option trades like the short strangle, your broker typically holds aside 15% to 20% of the stock price as the margin requirement. With FCX currently trading at $10.40, the initial cost of the strangle should be about $156 to $208.
The potential return on initial margin required, then, is 21.6% ($0.45/$208).
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
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