Commodity stocks were surging on Friday and boast some of the best-looking charts in the market.
While most equities have struggled amid sky-high inflation and geopolitical turmoil this year, today’s selections have not. Instead, they’ve been holding firm near 52-week highs. Importantly, they avoided breaking any support zones during this week’s selloff.
History has proven commodity stocks shine during high inflationary environments. When oil prices soared in 2007 and 2008, the two best performing sectors were energy and basic materials. We’re seeing similar muscle-flexing now. Instead of just focusing on oil, I’m also pitching a play on steel and copper.
That said, here are today’s top commodity stock picks.
I’m matching the diversified list with three options strategies that provide varying tradeoffs between probability and profitability.
Commodity Stocks: Freeport-McMoran (FCX)
Freeport-McMoran was up 4% in early trading on Friday, and it’s testing a significant resistance zone near $46. The past two months have seen a cup and handle pattern form, giving clarity and purpose to the current breakout attempt. Meanwhile, the price trend is cruising nicely above rising 20-day, 50-day, and 200-day moving averages. It’s a posture that very few stocks enjoy right now. And it makes FCX stock a standout.
I’m reserving more aggressive bullish strategies for my next two picks. With FCX, short puts are always my go-to trade for two reasons.
First, the stock price is low enough to keep the margin required minimal. Second, options premiums are nearly always pumped up due to the stock’s higher volatility. Together, these two facts create a compelling return on investment with naked puts.
The Trade: Sell the April $40 puts for $1.15.
Consider this a bet that FCX is above $40 at expiration.
Nucor’s flight path has mirrored FCX this year. But while the copper darling is only breaking out to a 10-year high, NUE stock is inches away from a new record. And that brings all of the optimism that should surround a stock pushing to all-time highs. For months, $125 has proven stiff resistance. Multiple rallies have failed at its doorstep, making the eventual breakout all the more significant.
If today’s ascent sticks, it could spark the next leg to Nucor’s long-term uptrend. The moving averages are stacked atop each other in a bullish fashion. Thursday’s down gap found support right at the rising 20-day, which further reiterates buyers are in control. NUE stock has a history littered with successful breakouts. I like a more aggressive directional trade like call spread to capitalize.
The Trade: Buy the April $130/$140 bull call for $3.40
You’re risking $3.40 to make $6.60 if prices climb above $140 by expiration.
Commodity Stocks: Chevron (CVX)
Oil stocks need no introduction. They’ve been topping the leaderboard all year long and have been riding high on continued strength from crude oil. The Russia-Ukraine situation has only intensified demand for black gold and has investors hyper-focused on energy companies. Chevron’s share price has held up exceptionally well despite a volatile week.
Friday’s 3% pop has CVX stock testing old resistance near $139, and a breakout appears imminent. Cash flow plays have been working for months, so I’m going with a bull put spread as today’s trade idea. This strategy will deliver as long as commodity stocks don’t entirely fall out of favor over the coming weeks.
The Trade: Sell the April $125/$120 bull put for 60 cents.
If CVX stays above $125, you will capture the max gain of 60 cents. The max loss is $4.40.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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