Trade Summary: July 27, 2015

| July 27, 2015

July 27, 2015

 

 Trade Rationale

There’s clearly been a lot more going on in the financial markets this summer than what we’re used to seeing during the hot months.  Volatility has been higher than normal based mostly on events in Europe (regarding Greece) and China (regarding the stock market selloff).

With so much going on, the focus has been mostly on stocks and where they’re headed.  However, one of the hardest hit markets over the past few weeks has been commodities.  The iPath Bloomberg Commodity ETN (DJP) is an equally-weighted commodity fund, which does a good job of reflecting the commodity market in general.  DJP is down 8% over the last month, and almost 5% over the past week.

Some of the hardest hit commodities are oil, gold, silver, copper, and coffee.  Overall, there are very few commodities even positive for the year.  Clearly, it’s been a tough year for the asset class.

The biggest catalysts are China’s economic downturn and the strong US dollar.  China has been the biggest consumer of commodities in the world for the last several years.  And, commodities tend to move opposite the dollar.  In other words, the variables are stacked against commodities right now.

Still, it doesn’t mean opportunities in commodity companies are lacking.  The low price of certain commodities has made some quality companies very attractive.

One such company is Freeport-McMoRan (FCX).  FCX is a big copper and gold producer.  I’m not a big fan of gold right now, but I believe copper has potential for a rebound.  China may not be consuming copper like it used to, but Europe and the US still provide plenty of growth potential.  What’s more, FCX is dirt cheap at the current price.

Another good opportunity is being provided by Cheniere Energy (LNG).  This company is a leading provider of liquefied natural gas.  While the market for natural gas is improving overall, there’s always been a ton of potential with liquefied natural gas due to its utilization as a fuel.  The recent downturn in commodity-related stocks could make for a solid entry point to LNG.

Finally, let’s take the opposite position on Franco-Nevada (FNV).  As I said earlier, I’m not a huge fan of gold at current levels.  It’s one commodity which could remain depressed for quite some time (along with oil).  FNV has pulled back sharply lately, but is still priced at a very rich value.  Let’s buy puts on this company.

 

Trade Details

#1) Buy Freeport-McMoRan (FCX) October 16th 12 Calls up to $1.50

For this trade, we’re looking for an up move.  Our first profit point for conservative traders is at $14.  For aggressive traders, you can hold up to $17.  For risk control, the conservative exit level is $10.50.  $9 is the final exit level for aggressive traders.

Freeport-McMoRan

#2) Buy Cheniere Energy (LNG) September 18th 70 Calls up to $2.40

With this trade, we’re also looking for a move higher.  Our first exit point for conservative traders is at $71.  For aggressive traders, you can hold to $74.  For risk control, the conservative exit level is $59.50.  And, $57 is the final exit level for aggressive traders.

Cheniere Energy

#3) Buy Franco-Nevada (FNV) September 18th 40 Puts up to $3.00

Finally, we’re looking for a down move in FNV.  Our first profit-taking exit point for conservative traders is at $37.  For aggressive traders, you can hold to $35.  For risk control, the conservative exit level is $45.  $48 is the final exit point for aggressive traders.

Franco-Nevada

 

Category: AOA Trade Summary