A surprise announcement can play havoc on a stock. For example, when a company acquires another company, the buyer usually sees a decline in the value of its shares when the news first comes out.
Here is a trade idea on a company that recently acquired not just one, but two companies:
Freeport McMoRan (NYSE:FCX – $31.70): Long Calls
On Wednesday, Freeport-McMoRan (NYSE:FCX), the world’s largest publicly copper producer, announced it would acquire Plains Exploration & Production (NYSE:PXP) and McMoRan Exploration (NYSE:MMR). Investors didn’t seem to like that the copper producer was acquiring oil and natural gas producers, and shares fell 16%.
Can this be turned around? Oracle Investment Research thinks it can, as it upgraded the stock to a “strong buy” and the stock rebounded somewhat on Friday.
Click to Enlarge Technically, the stock fell to an area where it has some strong support. FCX has support right above $31, and several attempts to close below that area earlier in the year were denied. If that support holds and investors see this as a bearish overreaction and a possible buying opportunity, the stock might move higher again.
The trade: Buy the January 32 calls for $1.43 or less.
The strategy: The long call is probably the most fundamental option strategy, and most of the time it is used for a bullish outlook on a stock. The trade can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is theoretically unlimited because FCX can continue to rise, and the maximum loss is $1.43 if FCX finishes below $32 at January expiration. Breakeven is $33.43 based on a cost of $1.43 at expiration.
As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.