The energy space isn’t the only beaten-down sector seeing a resurgence in bullish activity. Basic material stocks — a close cousin to energy — have also turned a corner recently.
The newfound strength has seeped into Freeport-McMoRan Inc (NYSE:FCX) lifting the struggling stock about 25% in the past few weeks. While the nascent recovery marks a refreshing change in character for FCX, resistance levels aplenty remain overhead, which may stymie its rally.
A brief survey of the chart of FCX stock reveals its current wrestle with two supply zones. First we have the declining 50-day moving average. This oft-watched smoothing mechanism is known to act as resistance in a downtrend.
While FCX stock was able to close just above the 50-day moving average in Wednesday’s trading session, it’s too early to tell if that was a successful breach.
The other dynamic that should concern FCX bulls is the prior support zone and gap (now filled) in the $21 area. This old support could become new resistance.
FCX may well continue its trend reversal, but in light of the aforementioned resistance levels and the fact that it’s up a quick 25%, I suspect a pause is in order.
On the volatility front FCX remains lively. Though its latest earnings announcement has passed, the elevated volatility in the stock has kept option premiums on the expensive side. With its implied volatility perched at the 84th percentile, the IV rank of FCX is one of the highest in the market these days.
2 Option Trades for FCX
Traders looking to fade the FCX stock rally could consider selling the Mar $23 calls for 45 cents or better. The maximum gain is limited to the initial 45 cents and will be captured provided FCX remains below $23. The risk is theoretically unlimited, so consider exiting the trade if FCX trades above resistance around $24. That should limit the loss to around $125.
Those wishing to adopt more of a neutral posture on FCX could sell March strangles instead. A short strangle consists of selling an out-of-the-money call and put. It’s a delta-neutral strategy that profits if the stock trades in a range or if implied volatility drops. Sell the Mar $23 call and Mar $19 put for a credit of 86 cents or better.
The reward is limited to the initial 86 cents credit and will be captured if FCX remains between both strikes ($23 and $19). Like the naked call, the risk with the short strangle is also unlimited. I suggest exiting if FCX ventures too far outside of the profit range, such as above $24.50 or below $17.50.
As of this writing, Tyler Craig owned short calls on FCX.
