Commodity play Freeport-McMoRan Inc (FCX) has been digging in on the price chart. And for options traders, the time looks right to establish a nondirectional long strangle in FCX in anticipation of a volatile move.
What’s going to move the typically volatile FCX from its technical ennui? As it turns out — as many investors are probably realizing — it’s complicated.
In recent days, the supports for a rally range from a still (and now more) accommodative Federal Reserve following the Brexit to gold rallying to fresh highs in the face of global uncertainty and low rates.
Even copper, Freeport-McMoRan’s most important commodity, has managed to hit its best levels in nearly two months after badly lagging the rally in commodities this year.
And yet FCX stock is off about 9% over the past week. Adding salt to the wound, the price action in FCX comes despite the broader market roaring back and the “risk-on” attitude in full stride once more.
So, what gives?
Maybe a forward-looking market is discounting the previously mentioned supports and weighing on FCX in anticipation of bearish economic consequences of the Brexit — rather than participate in the day-to-day whims of investors this past week?
While I don’t have the inside skinny on that front, I do see a nice-size congestion pattern, and one primed for a volatile move which nondirectional options traders can look to capitalize on.
FCX Stock Daily Chart
All trends do eventually end. And in looking at the lateral, directionless trend in FCX over the past several weeks, this one appears to be readying itself for a breakout move.
For the bulls, a stochastics crossover and a hold of the 38% Fibonacci support level which sits above the 200-day simple moving average are factors supportive of higher prices in FCX.
Bears might counter with the argument of FCX’s relative weakness of late being an obvious canary in the coal — or more aptly, copper — mine.
Personally, I’m more leaning toward the bullish case for FCX stock. But our view is Freeport-McMoRan is simply a volatile name whose current and relatively quiet price behavior is unlikely to continue.
FCX Long Strangle Strategy
In anticipation of a meaningful move in Freeport-McMoRan away from its congestion pattern, the Aug $13 call/$9 put strangle looks attractive as a nondirectional play for active traders.
Priced for 72 cents with shares of Freeport-McMoRan near $11, the trader is in need of FCX stock being above $13.72 or below $8.28 at expiration in order to capture a profit.
The greater the distance from the purchased FCX strikes, the more this nondirectional trader makes. Ultimately, given sufficient stock movement, this spread winds up acting like an in-the-money call or in-the-money put.
Prior to expiration, profits are possible at lower FCX stock levels due to an existing time premium in both contracts if a move towards either strike develops. Further, if implied volatility rises, the trader has the opportunity to profit, as the long strangle is a long volatility spread.
Bottom line, this looks like a nice opportunity to profit from either a bullish catch-up or bearish canary move in FCX with limited risk. But with a finite lifespan and premium which can collapse to $0, further mitigating risk with a 50% money stop is a good policy to consider.
Mr. Tyler does not own positions in any of the securities discussed in his personal or managed family accounts, but may initiate a position following the publication of 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.
