Trade Idea $FCX – Copper Shopper

by Dan December 4, 2015 1:24 pm • Commentary

If the 3% decline in the US Dollar vs the Euro yesterday demonstrated anything to investors, it’s that when consensus, crowded trades unwind, they do so in a violent fashion. There have been few consensus trades in 2015 that have performed as well as short industrial metals and miners.  While commodities like copper have been cut in half since its 2011 highs, the equities of producers like Freeport-McMoran (FCX) have seen their market caps being priced for far worse conditions.

FCX is down 66% on the year, today making a new 52 week and 10 year lows, below those made in the throes of the financial crisis:

fcx10
FCX 10 year chart from Bloomberg

The stock caught my eye today because of that new low, breaking the level from late August when activist investor Carl Icahn announced he took a 100 million / 8.65% stake in FCX (green circled below). And now more than 40% below the levels from early October (red circled) when Icahn and FCX agreed on some of Icahn’s recommendations, with Icahn’s representatives gaining 2 board seats.

FCX 1yr chart from Bloomberg
FCX 1yr chart from Bloomberg

Investor sentiment towards commodities has been atrocious, but with investors like Icahn poking around the space, I suspect he thinks this company in particular is fixable (assuming that copper and gold don’t crater further.)

If one was inclined to make a contrarian bet in FCX into the new year, and additionally ride Icahn’s coat tails with the hopes of some positive change on the corporate front, and with the possibility of a slight uptick in copper demand, then you might want to consider a long stock alternative that creates a band where you have significant leverage to sharp upside move, with the worst case scenario in three months being put the stock down more than 20%:

*Trade Idea: FCX ($7.80) Buy Feb 6 / 10 Risk  Reversal for even money

-Sell to open 1 Feb 6 put at .33

-Buy to open 1 Feb 10 call for .33

Break-Even on Feb Expiration:

-Profits: above $10 up 28%

-Losses: Below $6, down 23%

Rationale:  Options prices are through the roof, with 30 day at the money implied volatility at 66%.

FCX 1yr chart of 30 day at the money IV from Bloomberg
FCX 1yr chart of 30 day at the money IV from Bloomberg

Long premium directional strategies are a tough way to make money in a stock like this.  At the very least one would want to make a defined risk bet by using a call spread, but in this trade structure the put sale finances the purchase of the call sale. If the stock is between $6 and $10 on Feb expiration then there is no gain or loss.  On a mark to market this trade will have losses as the stock moves closer to the short put strike on Feb expiration, and have gains as the stock moves closer to the long call strike.  This risk reversal also has about 45 deltas, so the position will gain or lose about 45 cents in value for every dollar move up or down in the stock.

For those looking for an epic short squeeze in the near year, I much prefer this strategy to long stock.