How Options Traders Can Capitalize on Red-Hot Copper

FCX and SCCO stocks have room to run, should bears change their tune

Dec 28, 2017 at 10:33 AM
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Copper futures have been red-hot lately, flirting with three-year highs on signs of solid demand from China. Further, the front-month copper contract is on pace for a sixteenth straight up day. Rallying with the metal have been shares of Freeport-McMoRan Inc (NYSE:FCX) and Southern Copper Corp (NYSE:SCCO), and one of the stocks is sending up a signal to buy short-term options right now.

FCX Stock Eyes Best Month Since Election

Freeport-McMoRan stock has been higher 12 of the last 16 sessions, notching a fresh two-year high of $19.06 yesterday. In fact, FCX shares have skyrocketed 35% so far in December, pacing for their best month since November 2016. At last check, the equity was up 0.7% at $18.81.

What's more, a round of upbeat analyst attention could drive the security even higher. Despite handily outperforming the broader equities market in the past three months, FCX stock sports just four " strong buy" ratings, compared to 11 "hold" or worse recommendations. Should analysts change their collective tune, upgrades could lure more buyers to the table.

Southern Copper Short-Term Options Attractive

In the same vein, Southern Copper stock has ended nine of the last 12 sessions in the black, and notched a six-year high of $47.53 out of the gate today. SCCO shares have surged nearly 13% so far in December, pacing for their best month since July. Year-to-date, the security has rallied 48%, with pullbacks contained by its 20- and 40-week moving averages. At last check, Southern Copper shares were up 0.3% at $47.21.

And, while SCCO stock assails new heights, its short-term options prices are in the proverbial basement. The equity's Schaeffer's Volatility Index (SVI) of 22% is higher than just 13% of all others from the past year, pointing to relatively attractive short-term premiums amid muted volatility expectations.

The last three times Southern Copper stock was flirting with 52-week highs and sported a low SVI, the shares went on to rally one month later, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Specifically, SCCO stock averaged a one-month gain of 5.89% after these signals. A similar surge from curent levels would place the shares around $50 -- north of their 2011 all-time high.

As with FCX, there's still plenty of room on the bullish bandwagon for Southern Copper, too. Five out of six analysts maintain "hold" or worse ratings, suggesting upgrades could be in the cards. Meanwhile, short interest represents nearly nine sessions' worth of pent-up buying demand, at SCCO's average pace of trading -- plenty of fuel for a short squeeze.


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