FCX – Pedal to the Metal

I bought FCX April 14 calls today.

I have been watching FCX for a while as the stock had a great run over 2016 and early 2017.  It has had a pullback over the last month or so and is consolidating around the 200-day moving average.  Today, the stock faded below the 200-day moving average and came back above.  This lead to a decent action point for me to analyze the market for a new trade.

Let’s look at the daily chart:

FCX 1.png

Chart from FreeStockCharts.com

The big key here is that this has been a strong performer and has now pulled back to a level where we should find support.  The market continues to try to push FCX below the 200-day moving average, but there has been no follow through.  With the pullback in commodities, the pullback in this name made sense.  But now, it seems like we can possibly see a run in this name if we see a bounce in commodities overall.  The key from this chart is that we are above the 200-day moving average, and that’s a bullish indicator.

I also want to take a look at the daily chart of JJC here.  JJC is the Copper ETN that closely maps the price of Copper:

JJC 1.png

Chart from FreeStockCharts.com

This is a quick view, but the key is that Copper prices are not falling the way FCX has and in fact is starting to see a bounce back from recent lows.  This generally should indicate there would be less of a bearish tone to FCX from Copper price pressure.  This is not going to be a determining factor of getting me into this trade, but if Copper was dropping rapidly, I would have been more likely to avoid this trade.

Next, I’ll note the same pattern in GLD which is the Gold ETF:

GLD 1.png

Chart from FreeStockCharts.com

Now I’ll look into the options markets to see if we can get the leverage that I generally search for in these types of trade:

FCX 2.png

Chart from LiveVol

This one is easy.  FCX Implied Volatility is the lowest it has been in 6 months and we are also seeing Realized Volatility perking up to get above the currently Implied Volatility level.

So, I’ll look at the markets for an outright long call position:

FCX 3.png

Screenshot from LiveVol

First, we note that April Implied Volatility is the lowest on the board (not including the weekly options that expire this Friday).  I think Implied Volatility can easily increase toward 40-45% on a rally, so I am comfortable having a little bit of Vega, and I like having that Vega position in 1 month options as I can get cheap Gamma there as well.  The April $14 calls for 0.19 look interesting.  Re-testing the 50-day moving average would put FCX up to $14.65, and any follow through beyond that would put these calls at a very solid R&R.  Simply put, I expect us to get back into a bullish market flow, and if it happens with Implied Volatility stable or lower, I’ll look to roll up my calls.  If it happens with Implied Volatility increasing, I’ll be more likely to take the money or roll into a call spread.  But right now, with the R&R I see on buying these for $0.19 that have a ~3-to-1 return on a mean-reverting move, and much more if we get a bigger bull run, I think this is worth a shot.

 

 

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