Progress off and on the price chart of Freeport-McMoRan Inc (NYSE:FCX) bodes well for risk-averse FCX stock investors. But for momentum traders looking to mine for profits with less of a grubstake — a bull call spread is well-suited for the occasion. Let me explain.
Copper has been surging higher in recent weeks and with it, shares of miner Freeport-McMoRan have rocketed in tow. That’s the nature of the beast when it comes to the price vagaries of commodity producers such as FCX stock and irrespective of the underlying hard asset.
But there’s more to FCX stock than just rising copper prices driven largely by rekindled optimism demand from China is going to support the market.
Freeport has also managed to put itself in better financial position over the past year. Management has been successful in largely divesting itself of its disastrous foray into the energy business, materially trimmed long-term debt and appears to be inching closer to an agreement with Indonesia at its key Grasberg mine.
Bottom-line, FCX is still considered a more speculative investment, but conditions off the price chart do appear to be improving. And if we’re to appreciate the other big picture that matters to traders, the groundwork for a more bullish environment is looking a good deal more complete.
FCX Stock Monthly Chart
Click to Enlarge As noted above, FCX stock has been on a tear the past month with shares up roughly 40%. But if one steps back to look at the big picture provided by the monthly chart while recognizing Freeport’s historical tendency to be persistent in its price action; a bullish momentum move could be just beginning.
With a smaller, albeit two-year long uptrend in place following a massive double-bottom, FCX is now just breaking through a major downtrend line. To keep moving higher shares will need to also clear channel resistance of the bullish trend.
At the end of the day, FCX stock may not deliver for bulls. But the ability of FCX to quickly build itself into a momentum name does have a historical precedent — and in our optimistic view, trumps the other more bearish possibilities.
FCX Long Bull Call Spread Strategy
In looking to get long FCX stock, something else that has my vote is using a limited risk bull call spread. This is a smart position as it reduces Greek risks and keeps potential losses to a defined and absolute amount of capital. Further, in the event the breakout fails, the trader isn’t exposed to larger losses as with other strategies such as selling a put spread. Ultimately, momentum in FCX can be a two-way street.
Reviewing Freeport’s options and shares at $19.75, one favored combination is the March $22/$24 call spread for 33 cents. Using the vertical versus buying the lower strike call cuts premium exposure by nearly 50% and keeps the trader’s overall risk to about 1.5% of FCX stock.
With an embedded earnings catalyst later this month, the necessary momentum to capture the max payoff of $1.67 or return of 500% could be quickly on its way to being a reality. Failing that and for all those grayer areas in-between, the ability to adjust the position while maintaining minimal risk still makes this vertical an attractive position for bullish traders in lieu of owning FCX stock.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.