Call Options Or Put Options On Freeport-McMoRan (FCX)?

| May 16, 2012 | 0 Comments

FCX OptionsFreeport-McMoRan Copper & Gold (FCX) is an international mining industry leader based in North America.  They have large geographically diverse assets and significant proven and probable reserves of copper, gold, and molybdenum.

FCX has plummeted from $55 in early 2011 to around $33 today.  As you can see, FCX is down more than 40% from its 2011 high.  And the stock is down 30% from the lower high it set earlier this year.

Is this an opportunity to buy call options on FCX before it comes racing back?   Or is this the time to buy put options on FCX as it falls to new lows?

The bulls make a convincing argument…

They’re quick to point out that Freeport has rock solid fundamentals.  They grew revenue from $15 billion in 2009 to $20.8 billion in 2011.  And net income shot from $2.7 billion to $4.5 billion over the same time.

FCX clearly has a strong history of profitably growing their core business.  And their strong growth is expected to continue.

Analysts are expecting FCX’s earning to grow nearly 30% next year.  And sales are expected to increase at 14% per year over the next five years.

What’s more, they have a strong balance sheet with a very strong 3.4 current ratio and interest coverage of ratio of 21.2.  So they should have no problem meeting their short term liquidity needs.

They also pay a solid and growing dividend.  Their current dividend yield of 3.1% is one of the highest of all of the materials stocks.

But that’s not all…

FCX is approaching a strong level of technical support around $30 to $28.25.  FCX made a sharp reversal the two previous times it fell to this level in 2010 and again in 2011.  And we should see buyers step in again if FCX falls much lower.

But the bears have a compelling case as well…  

They simply point to the macroeconomic slowdown.  It doesn’t matter how strong Freeport is fundamentally, they still can’t control the economy or the price of the raw materials they produce.

If the global economy slows, the price of copper, gold, and molybdenum are going to fall.   And falling prices will have a dramatic impact on FCX’s growth and profitability.

The reality is the global economy is struggling.  Europe is once again in turmoil.  And the entire Euro Zone is teetering on the edge of a recession.

A number of countries like Italy, Greece, and Spain are already in recession.  Economic growth in France has come to a standstill.  And the only reason they’re not already in a recession is the German economy is growing much more than expected.

In addition to that, China’s economy is slowing as well.  And they’re a huge buyer of raw materials.

In fact, China’s imports of raw materials have already begun to slow.  March imports of raw materials increased a meager 0.3%.  That missed analyst estimates for a 10% increase by a mile.

Obviously, if these economic headwinds continue, less demand for the raw materials FCX produces could send the stock plummeting.

If you think the bulls are right, take a look at buying the FCX August 2012 $35 Call for around $1.94.

If you think the bears are right, take a look at buying the FCX August 2012 $30 Put for around $1.85.

Good Investing,

Corey Williams

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Category: Call Or Put Options?

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.