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Option Briefs: Freeport-McMoRan Copper & Gold Inc. (FCX) Bears Pounce

Longer-term traders forecast extended losses for FCX

by 8/30/2013 12:51 PM
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Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) is caught in the bearish trading crosshairs today, as roughly 10,000 puts have crossed the tape thus far, compared to just 6,000 calls. Digging deeper into the data, it looks as though a handful of pessimistic options players are counting on a longer-term decline for the struggling mining concern.

To be more specific, nearly 1,600 contracts have changed hands at the January 2014 26-strike put -- 99% of them at the ask price, implying they were bought. These out-of-the-money puts traded at a volume-weighted average price (VWAP) of $1.06. Meanwhile, implied volatility has ticked higher, hinting at the initiation of new positions. Furthermore, data from the International Securities Exchange (ISE) confirms that at least some of the contracts were bought to open.

In order for today's put players to realize a profit, FCX must retreat below breakeven at $24.94 (strike price less the VWAP) by January expiration. With the security presently docked at $30.34, this would entail a drop of 17.8% -- in territory not explored since July 2009 -- over the course of the next five months.

At last check, the delta for this put stood at negative 0.24, suggesting it has a near 1-in-4 chance of moving into the money ahead of expiration. However, even if FCX remains above the $26 mark throughout the option's lifetime, the most the speculators risk parting with is the initial premium paid for their long put positions.

As alluded to earlier, Freeport-McMoRan Copper & Gold Inc. (NYSE:FCX) has had a rough go of it in 2013, shedding more than 11% year-to-date, and trailing the broader S&P 500 Index (SPX) by close to 26 percentage points during the same time frame. However, the shares have managed to gain some ground in recent months, adding about 15% since touching a multi-year low of $26.37 on June 24. Against this backdrop, there is a chance that today's out-of-the-money puts were scooped up by shareholders looking to hedge their open bets.


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