Is metals miner shiny or losing luster?
10/26/17

As earnings season rolls on, traders continue to analyze every statement that companies make during their quarterly reports. Sometimes what appears to be rather good news at first turns out to be potentially concerning news after further digestion. This is how things played out yesterday following the earnings report of Freeport-McMoRan (NASDAQ: FCX).

Freeport-McMoRan, based in Phoenix, AZ, operates mining operations in the US, Peru, Chile, and Indonesia. Yesterday before the open FCX announced what appeared to be great earnings: revenue growth was up 5.1%, and earnings-per-share (EPS) was up 138% to $0.31.1 The stock initially opened higher Wednesday morning, but then proceeded to fall down the proverbial mine shaft. Here’s what the morning chart for FCX looked like yesterday: 

Freeport McMoRan (FCX) 10/23/17 - 10/25/17

Source: OptionsHouse by E*TRADE

After initially digesting the numbers, traders likely turned sour on the future prospects of Freeport-McMoRan’s Grasberg mining operation in Indonesia.2

Some traders took advantage of the opportunity by purchasing 5,000 of the FCX January 11 puts for $0.11, which gives them the right to sell FCX stock for $11 per share on or before January 19, 2018. To profit from this trade in isolation, FCX needs to drop below $10.89 before January expiration. The risk/reward graph for the puts looks like this:

Freeport McMoRan (FCX) risk/reward (puts) 10/25/17

Source: OptionsHouse by E*TRADE

However, this could actually be a protective play. If traders buy stock, they can purchase puts as a hedge in case the price of the stock were to drop. Owning puts allows them to know exactly where they can sell their stock if it were to decline.

With the earnings numbers rather encouraging for FCX, but concerns over potential challenges with their Indonesian operation, along with the stock declining approximately 4%, it appears traders decided to buy FCX stock and concurrently purchase put protection. The risk/reward graph of the new position (long stock with protective puts) looks like this:

Freeport McMoRan (FCX) risk/reward (long stock plus puts) 10/25/17

Source: OptionsHouse by E*TRADE

So, even though there was put buying yesterday in FCX, it is just as likely traders were actually hedging a new long stock position. These traders would want FCX stock to rise in the future. It remains to be seen if these traders will strike gold with this position.

 

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1. Investor’s Business Daily: Freeport-McMoRan Stock Nears Buy Point On Earnings Beat. 10/25/2017.

2. Reuters: BRIEF-Freeport, Indonesia “highly motivated” on Grasberg deal. 10/25/2017.