Yahoo Finance Don’t Be Afraid of Freeport-McMoRan Inc (FCX) Stock
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Freeport-McMoRan Inc (NYSE:FCX) stock is violent. In the past 12 months, it rallied 80% off of its October lows and experienced two 30% corrections (in July and February) since.
Source: Nick Bastian via Flickr (Modified)
That said, today’s trade would be just that — a trade, not an investment. Meaning, if the earnings foil my setup, I will not turn it into an investment. So I consider this a speculative trade in my portfolio.
Fundamentally, FCX is not cheap. At 40 times earnings, I expect it to deliver on earnings, but it never does. It’s missed on its last four times at bats. Luckily, expectations from analysts are in check. They mostly have it as a “hold,” so the risk of surprise downgrades is muted.
Technically, FCX stock is looking bullish. It’s setting higher lows butting up against a resistance level. If the bulls can break through it then they can overshoot 7% higher.
But since I don’t like to chase stock prices higher, today I will share a trade that gets me long FCX for free and gives me room for error. When they see upside potential, most investors would buy the shares and hope for a rally. I am not a buy-and-hope trader. I see the same opportunities, but I prefer to sell premium around them than outlay money.
FCX Stock Options
The trick in selling premium is to find levels where prices are not likely to go. In this case I am going long FCX, so I need to find support levels that will hold through the next hiccup. Then time will do the rest, allowing the premium to die on the vine so I can retain my maximum profit.
The downside of this type of trading is that I commit to buying the shares lower. So in this case, I must be willing and able to own FCX stock should my trade sour.
The Bet: Sell FCX stock Nov $10 naked puts and collect 35 cents per contract to open. Here I have an 80% theoretical chance of success. But if price falls below my strike, I will accrue losses below $9.65.
I know that some investors are not likely to accept the risk of owning the shares. So I can accomplish the same trade using credit spreads instead.
The Alternate Bet: Sell FCX stock Nov $11/$10 credit put spread which has about the same odds of winning but with limited risk. That’s because you’re buying a put for every one you sell — yielding 30%. Compare this with risking $12.50 now, with no room for error, hoping FCX stock rallies 30% just to match the performance of the spread.
The Upside Juice (Optional): Buy FCX stock Aug debit call spread $13/$14 for 25 cents and if price rallies past my spread say behind an earnings burst, then I stand to double the value of the spread. Conversely, if price stays above my sold put then any premium I get back from closing the calls would be pure profit.
Investing doesn’t come with guaranteed results, so I never risk more than I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
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