After surging higher in January, Freeport-McMoRan Copper & Gold (NYSE:FCX) has thus far spent February in consolidation mode. As it digests the gains from last month, FCX looks to be setting up a clean base that can serve as a launching pad for higher prices.
Resistance at $47 is acting as a lid preventing higher prices for the time being. Once this lid lifts, however, a continuation in Freeport’s uptrend should be in the offing.
Upon a successful breakout above $47, traders looking for bullish exposure in the basic material space might consider selling a March put spread on FCX. (This strategy is also known as a bull-put spread, or a put credit spread.)
Selling out-of-the-money put spreads offers a higher-probability alternative to buying call options by providing a much larger profit zone. While a long call only profits if FCX rises in value, the put spread profits even if FCX trades sideways or drops a little, which moves the odds more squarely in your favor.
To play those odds, you can sell the FCX March 44-39 put spread for a $1-or-more credit. To enter the position, “sell to open” the FCX March 44 Put and, at the same time, “buy to open” the FCX March 39 Put. Prices that work right now are collecting $1.70 for the $44 puts and spending 50 cents on the $39 puts.
The maximum reward is limited to the initial $100 ($1 cents x 100) you receive, and this will be captured if FCX remains above $44 by March options expiration.
The maximum risk can be calculated by taking the distance between the strike prices minus the net credit. If this March $5 vertical spread (vertical means both options expire in the same month – in this case, March) is sold for $1, the max risk comes out to $4 and will be incurred if FCX resides below $39 at March expiration.
At the time of this writing Tyler Craig had no position on FCX.