Freeport-McMoRan Inc: Benjamins Rain in the Land of Copper (FCX)

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The copper beast has awoken. And he’s slaughtering short sellers as we speak. The once mighty Freeport-McMoRan Inc (FCX) is staging a solid comeback on the heels of the ongoing recovery in commodity prices. Shares of FCX are up an impressive 298% since finally carving out a bottom earlier this year at a lowly $3.52.

Shareholders are rejoicing. And why shouldn’t they? The FCX stock slide was relentless, seemingly hellbent on taking the ailing metal company to the graveyard.

The vultures were circling, the end was near. But no longer. All of a sudden commodities are back en vogue, baby. And the denizens of the Street want any and all stocks linked to metals and mining. Which places Freeport McMoRan square in their crosshairs.

The rocket-ship rise has done wonders in turning the technicals bullish. At is current perch, FCX sits well above all major moving averages.

It’s ascent has been sufficient in turning all but the longest of moving averages higher. Given the depravity of its previous price action, it will take some time to reverse the 200-day moving average.

FCX
Click to Enlarge
Source: OptionsAnalytix

Detractors of the FCX recovery may well point out its climb has reclaimed little lost ground in the grand scheme of things. And there’s certainly truth to that.

Once upon a time Freeport McMoRan lived like a king, its stock boasting a $60 price tag. But, hey, one step at a time. For now, FCX wants higher. And while it’s a bit extended given this week’s sharp rally, dips remain buyable.

If you’re a FCX shareholder looking to harvest some gains into the rally I have an idea worth consideration.

FCX Stock Replacement Strategy

One of the cleverest ways to take some chips off the table (but maintain the possibility for even more gains) is to swap out your long stock position with a call option.

It’s a gambit known as the stock replacement strategy. And it’s particularly attractive when option contracts are being offered up on the cheap, which is the case for FCX these days.

Implied volatility peaked when FCX bottomed in January and has descended ever since bringing option premiums down to more sane levels.

Suppose you own 100 shares of FCX, currently valued at $14 per share, or $1,400 total. If you wanted to take some money off the table while scoring additional profits should FCX keep ripping, then sell the stock and use some of the proceeds to snatch up the Nov. 9 call option for $4.82.

Since the call sits deep in-the-money, it boasts an 85 delta, which makes it an effective proxy for a long 100 share stock position. Furthermore, it has little time value which means the effect of time decay will be minimal.

With the cost a mere $4.82 you’ll tie up almost one-third less capital than the long stock position. By going out to November you have seven months of exposure to further gains should Freeport McMoRan’s recovery go the distance.

And if you don’t own any FCX shares? Continue waiting for a pullback of some sort before jumping in. The risk-reward is tough to justify following an insane 32% rise in one week.

At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/fcx-stock-freeport-mcmoran-inc-options/.

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