Traders look for comeback in metal legend
07/12/17

Move over Guns N’ Roses, this year options traders are looking for a metal comeback of a different kind.

Of course we’re talking copper, which has languished in relative obscurity for years. Its monster run last decade is mostly forgotten, relegated to the history books by slow global growth and replaced in investors’ hearts by more exciting sectors like technology. But yesterday options traders looked for the metal to start jamming again.

Industry bellwether Freeport-McMoRan (NYSE: FCX), the world’s biggest copper producer, was their target. Going to work less than an hour after the opening bell, buyers gobbled up 9,000 November 14 calls for $0.56. They came back during lunch for 5,800 of the December 13 calls, this time paying $1.05 and $1.10.

Calls fix the price where a security can be purchased. They can leverage a rally in the underlying shares but also lose all their value if no move occurs. The November 14s, for instance, will double if FCX climbs 22 percent to $15.12 and triple from a 27 percent gain to $15.68. But if the stock fails to reach $14, the calls will go to zero. Breakeven is at $14.56.

FCX rose 0.48 percent to $12.58 yesterday, clawing back from an earlier drop. Sentiment has been pretty negative on the sector as analysts fret about bloated inventories, but traders wonder if all the bad news isn’t priced in. After all, stockpiles grew less than feared this week and workers at a key mine in Chile are going on strike.1

Freeport-McMoRan (FCX), 3-month chart

Source: OptionsHouse by E*TRADE

Then there’s the bigger shift in commodities overall. It wasn’t too long ago that the experts wrote obituaries on iron ore, but it’s been on a tear.2 On top of that, you have a surprise rally in agriculture that no one expected, and even crude oil is trying to bounce. Maybe that’s why virtually every stock in the materials space – including FCX – shot higher on Monday. 

FCX has the additional catalyst of potentially resolving tax and regulatory disputes with Indonesia, where it has major operations. Its CEO was invited to visit Jakarta this month, so yesterday’s call buyer may be looking for a favorable outcome.3

Some chart watchers may also like the looks of FCX because it’s trying to bounce at its 50-day moving average… the same 50-day MA where it stalled in April and June. Is resistance becoming support?

Bottom line, FCX has struggled along with other metal stocks but yesterday traders looked for a turn.

 

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1. Reuters: METALS-Copper rebounds as stock build-up halts, Chilean miners to strike. 7/11/17. Reuters: Workers at Zaldivar copper mine in Chile approve strike. 7/10/17.

2. Bloomberg: Top Iron Ore Shipper Warns Price to Go Sub-$50 as Supplies Swell. 7/7/17. Barron's: Why One Bear Thinks Iron Ore Rebound Can Last. 7/7/17.

3. Reuters: Indonesia seeks meeting with Freeport CEO to end copper mine dispute. 7/11/17.