The latest bogeyman haunting equities is inflation. It’s stealing the headlines and driving capital flows. Money is fleeing richly priced growth stocks in favor of areas that historically benefitted from inflation, like energy and basic materials. Just this week, copper prices smashed through a critical resistance level and boosted one of my favorite material stocks — Freeport-McMoran (NYSE:FCX). If you think the inflation theme is here to stay, FCX stock is a must-buy.
And even if you weren’t aware of all the inflationary pressures impacting the economy and how it plays to the advantage of FCX, its price chart is reason enough to perk up and play.
The long-term trend is a thing of beauty. We’re not talking about a garden-variety doubling or tripling off the March 2020 pandemic lows. Instead, this copper stock has gone up nearly 10x from those lows! Real earnings growth and fundamental factors are driving the bull market.
FCX Stock Charts
Naysayers may balk at the meteoric rise and could contend FCX is too expensive, but picking tops is futile. Instead, I suggest embracing the reality that a trend in motion stays in motion. And here’s the reality. Prices first topped $46 last May, and they’ve traveled both down and sideways since. So, we’re not only not chasing; we’re buying a breakout from an eight-month base.
Zooming in to the daily time frame shows upside momentum heating up. Note how the distance between pivot highs is expanding, and the 20-day moving average is ramping faster than the 50-day. Copper’s breakout drove Wednesday’s gap, and prices are holding firm so far in early trading on Thursday. The strength is a welcome change to the choppy range that plagued Freeport’s chart for the past year.
We’re now testing the May peak near $46. Pushing above it could bring fresh buyers to the yard.
An earnings announcement is looming on Jan. 26, but I’m not concerned about holding into the event. Historically, FCX stock has barely moved following its quarterly reports. It’s been far more volatile between the events than during them. Besides, the recent copper strength will cause investors to look past any missteps the report may contain.
Copper & Options
Before Wednesday, copper prices were stuck in a multi-month range without much to talk about. But yesterday changed the narrative. Dollar weakness helped the metal finally power through resistance at $4.50, clearing the way for a return to the 52-week high near $4.80. Volume exploded alongside price, adding significance and legitimacy to the move. It suggests the breakout has staying power.
I also don’t think it’s coincidental that Chinese stocks and other emerging market equities also surged.
FCX is one of my favorite stocks to build options trade on for two primary reasons as an options trader.
First, it has a low share price. For the past year, it has mostly traded between $30 and $45, which is cheap enough to make premium-selling strategies like naked puts and covered calls feasible. The capital required is low enough to generate high returns.
Second, it has expensive options due to its above-average volatility. For instance, the S&P 500 carries implied volatility of 17%. FCX’s vol sits at 46%, roughly three times higher. This makes for some beefy paydays for options sellers.
A High-Odds Trade in FCX Stock
I like just about any bullish-leaning trade here, but if you want a larger margin of error in case the stock gets squirrely after earnings, then try selling puts. Recall that when you sell a put option, you get paid for making a promise to buy shares at the strike price. If the put remains out-of-the-money, it will expire worthless, allowing you to pocket the original credit received. But, if the put sits in-the-money at expiration, then you’ll be assigned and have to buy shares.
Such an outcome may not be bad if it’s a company you wanted to acquire anyway.
The Trade: Sell the Feb $38 naked put for 50 cents.
On the date of publication, Tyler Craig was long FCX. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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