VMW, FCX Options – Unusual Trading Activity – December 7, 2012
This week we’re taking a look at some very unusual options trading activity in VMware (VMW) and Freeport McMoRan Copper & Gold (FCX).
As many of you know, unusual options volume can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.
This is something professional options traders pay a lot of attention to, and for good reason…
Unusual options activity can “tip off” big moves in a stock, either up or down.
So let’s take a look at some ‘interesting’ activity that caught our eye this week:
VMware Options (VMW)
Virtualization software company VMware (VMW) is experiencing a large amount of trading activity this week. Yesterday, bearish put option volume soared above the daily average.
The cloud computing company’s stock has seen its share of ups and downs recently. And in all reality, VMW has been in a trading range between $80 and $100 for nearly two years.
Earlier this year, VMW attempted to break out from its long term trading range. It even reached a bull market high of $118.79 in April.
But it didn’t last long…
The breakout failed and VMW was back at support around $80 by July. Since then, VMW has fallen back into its old trading range between $80 and $100. And it’s currently trading for around $91 per share.
At least one trader thinks VMW is on the verge of retesting the $80 support level in the near future. They bought 3,224 December 2012 $85 puts for $0.95.
And we know it was a new purchase because the volume was well above the open interest at the beginning of the day.
Is this a good trade?
In a word… No!
Look, VMW has been in a trading range between $80 and $100. If you want to make a bullish bet on the stock, buy calls when the stock is near $80. If you want to make a bearish bet on the stock, buy puts when it’s near $100.
But don’t touch it when it’s in the middle of the trading range. Put simply, you don’t have an edge. At best, it’s a coin flip whether the stock tests support or resistance first.
In fact, since the last edge of the range it touched was support around $80, I would argue there’s a better chance VMW hits $100 before it falls back to $80.
I think this is a bad trade by someone who didn’t take a close enough look at the chart.
Freeport McMoRan Copper & Gold Options (FCX)
Option volume on the Freeport McMoRan Copper & Gold (FCX) spiked yesterday.
Shares for one of the world’s largest copper producer are currently trading for $30.00 per share. The shares recently plunged more than 20% after they announced plans to acquire Plains Exploration & Production (PXP) and McMoRan Exploration (MMR).
The two deals will cost FCX $9.1 billion in cash and stock. The tab runs up to $20 billion when you include the debts FCX assumes. But since FCX already has a 36% stake in MMR, the acquisition costs are a bit lower.
The acquisitions are being done to create “a premier US based natural resource company”. And it represents FCX’s first move into oil and natural gas assets inside the US.
According to our tracking system, option traders are expecting FCX to rebound in the coming months. The volume of contracts trading hands on the FCX April 2013 $40 call soared to over 17,500 yesterday. One trader alone purchased 10,000 of the options for $0.17 apiece.
Can FCX rebound?
It all depends on how investors perceive the new version of the company.
Will they like the diversification the oil and gas assets add to their copper, gold, and molybdenum mining? Or does it make them too confusing to properly value?
A quick look at a chart of FCX reveals that $30 has been a support level since 2010. So making a speculative call on FCX moving higher with inexpensive call options seems like a calculated gamble that investors will eventually embrace the newly expanded business.
We’ll see how it plays out in the months ahead.
More Options Ideas…
That wraps up this week’s unusual options trading and volume…
Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.
We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!
So keep an eye on your email inbox… we have a lot more options trading ideas coming your way!
Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
