Metals bulls come back to copper giant
09/20/17

Metals had an explosive summer, and options traders are sticking with their favorite name in the space.

The S&P Metals & Mining index is up 13 percent since June 20. That’s six times the move of the broader market over the same period, and more than twice the gain of the eyeball-grabbing technology space. Analysts credit the move to a stronger global economy, rising commodity prices, and better company fundamentals.1

Bullish options activity was detected shortly before lunch yesterday in Freeport-McMoRan (NYSE: FCX) as traders amassed nearly 13,000 October 14 calls for $0.70 to $0.80. Calls fix the price where a security can be purchased, so they can profit from a rally but also go worthless if no move occurs. 

FCX rose 2.48 percent to $14.48 yesterday. Say the copper giant climbs another 7 percent to $15.50 on expiration. Tuesday’s calls will double in value. What if it goes up 12 percent to $16.25? Then those calls will triple. But if it hits a brick wall and reverses back under $14 they’ll turn to goose-eggs. Breakeven’s at $14.75.

There’s also some real-world context. While past performance doesn’t predict future gains, in mid-July traders built a similar position and then saw it triple in value as the shares blasted higher into late August. It’s not the first rodeo for these bulls. 

Freeport-McMoRan (FCX) 3/24/17 - 9/19/17 chart

Source: OptionsHouse by E*TRADE.

FCX is also the most active stock in the sector based on options activity, averaging 57,000 contracts per session in the last month. Here’s a list of some other big names in the space that have exhibited relatively high trading volumes: 

  • U.S. Steel (NYSE: X): 52,000 contracts per session in the last month. 
  • Vale (NYSE: VALE): 29,000 contracts per session in the last month.  
  • AK Steel (NYSE: AKS):  20,000 contracts per session in the last month.  
  • Alcoa (NYSE: AA): 10,000 contracts per session in the last month.  
  • Teck Resources (NYSE: TECK): 10,000 contracts per session in the last month.

FCX pundits might add that the stock has something that both fundamental and technical analysts can appreciate. Investors point to the last quarterly report, with revenue and guidance blowing past expectations.2 They’re also looking forward to more certainty as management settles a long-running tax fight with Indonesia.3

Chart watchers noted that the stock recently bounced around the same $13.80 level where it peaked in April. (Bulls love it when resistance becomes support.) They added that FCX’s 50-day moving average just rose through its 200-day MA. Sure, it may be a copper stock, but that there is a golden cross.

Bottom line: Metals have been quietly rising, and traders are looking for more upside in FCX.

 

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1. The Wall Street Journal: Bond Upgrades Relieve Pressure on Commodity Firms. 8/3/17. Forbes: Copper Is Sending A Message About China's Economy. 9/5/17. Mining.com: Copper price rallies after Grasberg violence. 8/21/17.

2. Reuters: Freeport stock soars 15 percent on copper prices, permit progress. 7/25/17. Marketwatch: Freeport-McMoRan shares gain 2% after company swings to a profit in Q2. 7/25/17.

3. Reuters: Indonesia cheers Freeport 'win' as Grasberg valuation fight looms. 8/3/17.