Why Freeport-McMoRan Inc (FCX) Could Be Headed for New Lows

FCX option players are pricing in a bigger-than-expected earnings move

Jan 22, 2016 at 1:03 PM
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Mining interest Freeport-McMoRan Inc (NYSE:FCX) is no stranger to heavy losses. The stock has given up more than 93% of its value in the past five years, and is off 41% so far in 2016. In fact, FCX has been one of the worst S&P 500 Index (SPX) performers for the current year. The shares are down 7.9% at $3.99 today -- not far from Wednesday's 15-year low of $3.52 -- and some options traders are placing eleventh-hour bets.

According to a report this morning, the company's Indonesian unit must pay $530 million into an escrow account -- on top of some $80 million already put aside -- to extend its permit to export copper concentrate out of Indonesia past late January. The payment is also meant to guarantee the completion of a smelter project, which seems to be far behind schedule.

FCX options are trading at an accelerated clip today, with calls outpacing puts thus far. Among the most active contracts for the day are the weekly 1/22 series -- which expire in just a few hours -- where new positions are being initiated at the 4- and 4.50-strike calls, as well as the 4-strike put.

In spite of the security's poor technical performance, call buying is nothing new. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), FCX's 50-day call/put volume ratio of 2.15 stands higher than four-fifths of all readings in the last 12 months. A mass exodus of "vanilla" bulls could weigh on FCX.

But one explanation for this preference for calls is that short sellers could be using options to hedge their bearish bets against a rally. Short interest on FCX has climbed nearly 26% during the most recent reporting period, and now accounts for almost 15% of the stock's total available float.

The company will report quarterly earnings next Tuesday, and it looks like option traders are betting on a much bigger-than-usual swing. Based on near-term at-the-money straddle data, traders are pricing in a 16.4% post-earnings move -- significantly larger than FCX's average one-day move of 3.5% after its last eight quarterly reports.

It's also worth noting that Freeport-McMoRan Inc (NYSE:FCX) turned lower after five of its last six earnings reports. Should the company once again disappoint, or should FCX extend its longer-term downtrend, a round of analyst downgrades could exacerbate selling pressure. Of the 13 brokerages currently following the equity, five still call it a "buy" or better, and not one rates it worse than a "hold." 

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