Trade Update – $FCX: Uncle!… Carl.

by Dan December 15, 2015 1:54 pm • Commentary

The largest single stock options trade so far today was a bearish roll in Freeport McMoran (FCX), a stock that we recently placed a contrarian bullish options trade in (read here).

First I want to describe the large bearish put roll that traded about an hour ago when the stock was $6.65.  There was a block of 67,000 Feb 6 puts sold to close at .72 which was in concert with a block of 67,000 Feb 5 puts bought to open for 42 cents.  This trade was an apparent roll down of a bearish view or merely protection against a long stock position or possibly even long credit.

As for our trade from December 4th, let’s refresh:

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

With the stock at $6.52, the Feb 6 put is now offered at .77, with a mark to market loss of 43 cents, and the Feb 10 calls are .20 bid, or down 13 cents. The trade is against us by 57 cents, vs what would have been a long entry at $7.80, which would be down $1.28.  On a relative basis this is preferable, but obviously but still wrong. At this point we need to make a decision on the trade, whether or not we want the risk of a new low, coupled with an explosion in options prices.

My issue today is that oil and the energy sector are up big, yet the commodity index is up small, and FCX is up less than 1%.  This is bad action, and if things turn again as they were yesterday, this stock is making lower lows.

I am now going to take my losses and move on, this was a poorly conceived idea in a stock in a sector that could be ground zero for some sort of market contagion in the coming months. However, due to the difficulty of trying to catch a falling knife, the risk reversal was the better way to go about it than buying stock:

Action: Buy to close FCX ($6.52) Feb 6/10 risk reversal for 57 cents. (.57 loss)

-Sell to close 1 Feb 10 call at 20 cents

-Buy to close 1 Feb 6 put for 77 cents