- Freeport-McMoran (FCX) shares have fallen 20% in the past three sessions and are deeply oversold.
- Small-caps are also oversold and testing significant support making the iShares Russell 2000 ETF (IWM) a tempting target for contrarians.
- Energy stocks are finally succumbing to the selling pressure, providing a rare buying opportunity for the Energy Sector ETF (XLE)
Stocks were off to a rocky start Monday, continuing the slide that began last week. With the S&P 500 suffering outsized losses for the third day in a row and the CBOE Volatility Index (CBOEINDEX:VIX) piercing the crucial 30 level, we’ve officially reached the panic stage of the swoon. Fear dominates the headlines and recession talk is making the rounds. Intelligent options traders dodge direction and bet instead on volatility in times like this. I’ll show you how in this week’s top stock trades.
Let’s make sure we first understand the difference. Directional trades focus on answering the question, “which way?” In contrast, volatility-based bets care more about the queries “how far?” and “how fast?” Speed and magnitude become the primary concerns.
This week’s stock trades all capitalize on the sky-high options premiums that are now available, given the surge in fear. We’re going to bet that the market selloff is closer to the end than the beginning. In other words, we’re wagering that the three tickers below won’t fall as far as expected.
|IWM||iShares Russell 2000 ETF||191.87|
|XLE||Energy Sector ETF||72.61|
Top Stock Trades for the Week: Freeport-McMoRan (FCX)
A lot has changed in a week. On Wednesday, Freeport-McMoRan (NYSE:FCX) was a stone’s throw from a 10-year high. The copper giant was riding the inflation wave alongside many other commodity-based companies. Its share price was locked in a powerful uptrend, and more gains were in the offing.
Then shares fell 20% in three days.
Jerome Powell’s hawkish commentary started the swift reversal of fortune. But it was then aided and abetted by rising Covid-19 cases in China. Copper prices are melting on Monday as global recession fears climb. With FCX stock prices down so far, I think the rubber band is stretched too far.
If you think prices are unlikely to fall to $33, or if you’re simply a willing buyer at those prices, then consider the following play.
The Trade: Sell the May $33 put for 45 cents.
iShares Russell 2000 ETF (IWM)
Small-caps are getting torched alongside everything else. Monday’s meltdown ushered the iShares Russell 2000 ETF (NYSEARCA:IWM) into the support zone that ended the last three major declines. There’s a chance buyers will finally make a stand and halt the madness of the past few sessions.
At least that’s the hope.
But even if they don’t, we can deploy a position that offers a wide margin of error courtesy of the implied volatility spike. In fine-tuning the entry, I suggest waiting for an up day to signal bulls have returned. We may see it later today, or it may not come for a few sessions. Either way, with the VIX now above 30, history suggests a bounce is looming.
The Trade: Sell the May $175/$170 bull put spread for around 75 cents.
Top Stock Trades for the Week: Energy Sector ETF (XLE)
Before last week, the energy stocks were immune to market weakness. Booming oil prices kept them climbing, regardless of whatever worries were inflicting risk assets.
Unfortunately, the current slate of problems is proving more troublesome. Powell’s tough talk and recessionary fears are finally coming to a head, and we’re seeing market weakness seep into every nook and cranny. Oil stocks, basic materials, gold, silver – you name it. The selling has been indiscriminate over the past three sessions.
But I’m not so sure the bullish narrative for oil and energy is dead. If you think the Energy Sector ETF (NYSEARCA:XLE) continues to outperform moving forward, then it’s one of the more attractive stock trades to play right now.
Like IWM, bull put spreads offer a high probability of success.
The Trade: Sell the May $65/$60 bull put for around 65 cents.