Copper bulls look for green Christmas
10/11/17

Some traders are looking for the red metal to go green for Christmas.

We’re talking about copper, in case you didn’t know.  It’s up 39 percent in the last year amid growing confidence toward growth in the U.S. and overseas. Kind of makes sense for a product found in countless applications like pipes, wires, and machinery... so, investors aren’t crazy to view it as an economic bellwether. 

And speaking of green, we’re talking about moolah, dinero, dough, bread, money–as in traders wanting to make some. Here’s what they did yesterday on that front in Freeport McMoRan (NYSE: FCX), the world’s biggest publicly-traded copper company:

  • Going to work about halfway through the morning, an options trader bought 18,000 December 16 calls for $0.46. They sold a matching number of December 18 calls at the same time for $0.13.
  • Owning calls fixes the price where a security can be purchased, while selling them creates an obligation to deliver shares if a certain level is reached. Combining the two is known as a vertical spread, effectively controlling a move from point A to point B.
  • Tuesday’s strategy cost a net $0.33, or $0.46 - $0.13. It was also the one of the largest transactions in the whole market.
  • The spread will expand to $2, more than six times the value of their $0.33 outlay, if FCX climbs 25 percent to $18 by expiration. That would, by the way, be its highest level in over two years.
  • Breakeven’s at $16.33, and the entire position will go worthless should the stock remain below $16 by expiration.
Freeport-McMoRan (FCX) 7/13/17 - 10/10/17 chart

Source: OptionsHouse by E*TRADE.

FCX ended the session up 0.63 percent to $14.41. Traders looking into their crystal ball saw a potential catalyst or two that could trigger a rally. First, management has been jawboning with politicos over permits and taxes on its key Grasberg mine in Indonesia.1 Second, earnings are due on October 25.

Market veterans often deal with that kind of uncertain calendar using vertical spreads. Say, for example, one or both events pan out in a positive way and FCX explodes higher. In that case they’ll have a piece of the action. But if things don’t go well and it drops, they only have a relatively small amount of skin in the game. Naughty or nice, they've got a plan.

Interestingly, the position expires on December 15–about two weeks before Santa comes to town. But hey, no one’s ever accused traders of being patient. Finally, FCX is trying to push back above its 50-day moving average after spending most of the last month below that level. That could turn into a potential stocking-stuffer for momentum-minded chart watchers.

Bottom line: FCX has worked higher as investors await key news, and traders are looking for a rally to new highs by late this year.

 

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1. Reuters: Indonesia mining minister estimates Freeport Indonesia worth $8 billion. 10/9/17.