You people know the drill here, this chart pattern is likely to become a bit more familiar in the New Year, the “triangle of death.” Today’s example is Freeport Mcmoran (FCX):
What’s fairly obvious at this point that this break below long term support between $28 and $30 should now serve as very staunch resistance on the upside.
Unsurprisingly, implied volatility (the price of options) in FCX has exploded to new 52 week highs as the stock has imploded to new 52 week and 5 year lows:
The normal course of action when vol spikes like that is to look for some strategies that fade that vol spike and make money on a reversion to mean. But this is probably an example of the “Moth to Flame” problem with options. It’s possible that FCX finds some footing soon and vol collapses but where would the stock be at that point? Probably alot higher. And if the stock continues to collapse the current vol will seem low in retrospect.
The issue is that FCX is a historically low vol stock that sees tremendous spikes in volatility when commodity prices go wild. So although the vol looks really high right now, it’s probably justified and considering the stock just got cut in half, it could be too low. Here’s the implied vol (red) graphed against realized (blue):
As CC said to me earlier when discussing short vol trades. “It’s a Trap!” There’s probably very few scenarios where FCX just stops on a dime and vol collapses. The most likely scenario for vol coming in is after a pretty serious V bottom and who knows what range the stock settle in after that.