Freeport-McMoRan Stock Pullback Could Be a Buying Opportunity for Options Traders

Options traders have been targeting calls on long-term outperformer FCX

Feb 9, 2017 at 3:04 PM
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    Freeport-McMoRan Inc (NYSE:FCX) is down 0.6% at $15.43 today, following a downgrade to "neutral" from "overweight" at J.P. Morgan Securities, as well as news U.K.-based miner Rio Tinto plc (ADR) (NYSE:RIO) may be planning to abandon its interest in FCX's Grasberg copper mine in Indonesia. Longer-term, however, the stock has been a monster on the charts, adding an impressive 210% year-over-year, including a 17% climb already in 2017. Since tapping an annual high late last month, the shares have pulled back, but that's not necessarily a bad sign. Plus, now may be a prime time to pick up FCX options.

    FCX's recent dip has put it just above the 40-day moving average -- a trendline that has been lending support for more than a month. This represents the stock's sixth pullback to the moving average over the past three years. And it's typically been a bullish signal for FCX, with the shares seeing an average 21-day return of 7.7%, and positive 60% of the time.

    FCX Daily Chart February 9

    It appears traders may already be anticipating future gains for FCX, too. For instance, short interest on the stock has dropped by roughly 46% over the last three months. The 65 million shares still sold short represent the lowest level in well over a year, and would take only two sessions to cover, at FCX's average daily volume.

    Options traders have been placing upbeat bets, as well. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have purchased FCX calls at more than twice the rate of puts over the last 10 weeks. Moreover, the resulting call/put volume ratio of 2.49 ranks just 2 percentage points from an annual high. Likewise, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.60 is lower than 96% of the past year's readings, indicating near-term options traders have rarely been more call-heavy toward FCX.

    Notably, the mining stock continues to present an attractive opportunity for options buyers. FCX sports a Schaeffer's Volatility Index (SVI) or 44% -- in the low 2nd percentile of its 52-week range -- as well as a 30-day at-the-money implied volatility of 44.5%, below 99% of all comparable readings from the past year. Put simply, near-term FCX options are pricing in historically low volatility expectations right now. Plus, the equity's Schaeffer's Volatility Scorecard (SVS) of 91 indicates the options market has underpriced FCX's ability to make big moves over the last 12 months.

    Of course, not everyone is an optimist when it comes to Freeport-McMoRan Inc (NYSE:FCX). Among the 15 brokerage firms tracking the stock, 11 rate it a "hold" or worse. What's more, the average 12-month price target of $14.72 sits at a discount to current trading levels. Should FCX keep its long-term rally alive, a round of analyst upgrades and/or price-target hikes could add fuel to its fire.

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