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Call Activity Swells on Freeport-McMoRan Copper & Gold Inc. (FCX)

Weekly bulls are undaunted by FCX's bearish brokerage note

by 4/24/2013 2:35 PM
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Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) received some bearish attention this morning, as analysts at Argus downgraded the stock to "hold" from "buy." Nevertheless, the mining issue has climbed about 4%, a move that hasn't gone unnoticed by optimistic traders. Roughly 53,000 calls have crossed the tape so far -- a 78% increase over FCX's expected intraday call volume, and more than three times the number of puts exchanged.

The weekly 4/26 30 strike has emerged as one of the more popular calls today, with north of 3,400 contracts crossing the tape -- about three-quarters of them at the ask price, pointing to buyer-fueled activity. More specifically, these near-the-money calls traded at a volume-weighted average price (VWAP) of $0.14. Because this strike holds open interest of fewer than 500 contracts -- and implied volatility was last seen 3.1 percentage points higher -- we can assume that new positions are being initiated here.

By purchasing the calls to open, speculators are betting on FCX to ascend past the $30.14 level (strike price plus the VWAP) by this Friday's close, which is when these weekly options expire. This denotes a rise of about 1.6% from the stock's current price of $29.66. Meanwhile, the delta for these bullish contracts stands at 0.34, meaning they have a more than 1-in-3 chance of arriving in the money.

This surge in call volume is more of the same for Freeport-McMoRan Copper & Gold Inc. The equity's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.64, with calls easily outstripping puts among options scheduled to expire within the next three months. In fact, this ratio hovers just 8 percentage points above an annual nadir, meaning near-term traders have rarely been more bullishly biased toward the stock during the past 12 months.

From a technical standpoint, however, FCX has been struggling on the charts, shedding over 13% year-to-date, and around 20% on a year-over-year basis. What's more, the shares gapped 5.8 % lower on April 15 alone, amid plunging commodities prices and a brokerage downgrade. Still, even if the stock fails to conquer the $30 mark, the most today's bulls stand to lose is the initial premium paid for their call positions.


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