With options traders — as well as anyone else playing the stock market — still nervous about making short-term calls, a move away from choppiness and toward betting on longer-term trends is increasingly attractive.
With Long-Term Equity Anticipation Securites, or LEAPS, investors can use options to position themselves for a profit that might ordinarily be too risky in the short term.
Below are two strategies for investors betting that, over the long term, a move higher in precious metals and a decline in options volatility will pay off.
FCX Calls
By Chris Johnson and Jon Lewis, Editors, The Winning Edge
Typically, investors look to invest in precious metals for a few different reasons. First, they usually fall into favor as a flight to quality when the economy is weakening or inflation concerns are rising. On the other hand, copper and other basic material metals see increased demand when investors sense that economic growth will spur demand for industrial goods. With the market writhing between the prospects of economic slowdown and growth at the same time, it would be nice to grab exposure to both sides of the metal markets.
Here’s how you do it:
As the name implies, Freeport-McMoRan Copper & Gold (NYSE:FCX) primarily mines for gold and copper, among such other metals as silver and cobalt. The fact that FCX crosses between basic material and precious metals is attractive, given that both commodities continue to see increased demand. This is why FCX is one of the few precious metal miners that has kept pace with increasing gold prices.
Despite the dual role that FCX plays, analysts are far from overly optimistic, as 73% of covering analysts currently rank the stock as a buy or better. We expect to see additional upgrades given the economic backdrop and the stock’s positive technicals over the longer term.
A great way to leverage this metal master is to buy the January 2013 50 Call for around $7.50.
VXX Puts
By Tyler Craig, Tyler’s Trading
The recent market turmoil has ushered in a new regime of heightened volatility. Due to the severity of the freefall, the CBOE Volatility Index (VIX) has rocketed to levels not seen since the infamous Flash Crash of 2010 and the raging bear of 2008. Some pundits contend this is the emergence of yet another full-fledged bear market that will be months or years in the making. Others scoff at such doom-and-gloom prophecies and insist this is a simple correction providing the savvy opportunist many basement bargains.
As is usually the case, I suspect the truth lies somewhere in between. Rather than try to make aggressive directional bets in a bipolar market such as the one at hand, how about exploiting the return to normalcy that inevitably happens after the occasional shocks to our system?
Among the bevy of exchange traded products in the volatility space, the iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) has been a favorite among many for acquiring short exposure to VIX futures. In the past, large spikes in the VIX Index have provided ideal opportunities for entering bearish positions on the VXX. Such an opportunity seems to be in the offing yet again. To exploit a fall in the VXX over the coming months, trader may consider purchasing the Jan 2012 34 Put option.
Source: MachTrader
At the time of this writing Tyler Craig had no position in VXX.
