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Despite the broader market's move lower, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has tacked on 1.6% to $33.44, thanks to a tentative wage- and pension-related agreement with union workers in Indonesia. In the options pits, however, put trading is running at a 65% mark-up to normal intraday levels, while calls have crossed the tape at about half their typical rate. One of the more popular options so far is the February 29 put, where 100% of the 3,654 contracts exchanged have done so at the ask price -- suggesting they were bought. Since implied volatility is marginally higher and open interest at the strike contains barely 2,400 positions, it's safe to say the out-of-the-money puts were newly minted. Data from the International Securities Exchange (ISE) confirms this theory.
The volume-weighted average price (VWAP) for the FCX puts is $1.18. Consequently, for today's bears to profit, they need the shares to dip below $27.82 (strike price less VWAP) over roughly the next five months. Additional gains will accrue with each step south of the breakeven mark, while the maximum potential loss -- which takes effect if the security is north of the strike at the closing bell on Feb. 21, 2014, when the options expire -- is capped at the initial premium paid.
It wasn't too long ago that Freeport-McMoRan was parked south of the $29 level. In fact, the stock spent much of June, July, and August trading below this strike. Still, delta for the put is docked at just negative 0.26, or 26%, meaning there's about a 1-in-4 chance the option will expire in the money.
Taking a step back ... it's possible that some of today's put buyers would actually prefer FCX to remain above the strike. A look at the charts reveals the stock's aggressive ascent since hitting a four-year low earlier this year -- specifically, the mining company has tacked on 26.8% since June 24, when it bottomed out at $26.37. In other words, the aforementioned traders may be shareholders aiming to guard against a potential pullback during the next half-year, using protective puts.
In other happenings, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is getting closer to its ex-dividend date next Thursday, as well as its earnings report the morning of Oct. 22. For the third quarter, analysts are calling for a per-share profit of 61 cents, or seven cents lower than one year ago.
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