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Freeport-McMoRan Copper & Gold Inc. (FCX) Traders Set a Top

Freeport-McMoRan Copper & Gold Inc. call writers drawn to LEAPS

by 2/19/2014 3:00 PM
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Option Brief: Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) calls are the options of choice today, outnumbering puts by about a four-fold margin. Most active is the January 2015 49-strike call, where 4,788 contracts are on the tape.

The vast majority of the transactions at the aforementioned LEAPS took place at the bid price, suggesting the contracts were sold. Also, volume at the strike has easily outdistanced open interest, indicating the creation of new positions.

By selling the FCX calls to open, the speculators are anticipating that the mining stock will still be trading below $49 by the time the option's expiration date rolls around next January. If that happens, then the LEAPS will expire worthless, and the call writers will retain 100% of the premium paid as their maximum potential reward.

On the other hand, if the equity rallies above the strike price -- a 45% premium to its current perch at $33.77 -- then the traders may be assigned, and forced to sell the shares for $49 apiece, no matter how high they've gone. Of course, this could also be part of a covered call strategy -- in which case, the call sellers can already satisfy any potential assignment obligations with stock on hand.

Technically speaking, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has risen quickly since hitting a multi-year low of $26.37 late last June. In the seven-plus months since then, the shares are up 28%.


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