Options for stock investors. A better way to trade.

Digging for Double New Trade Alert June 12th – Freeport McMoRan

New Trade Alert for Freeport McMoRan

Buy FCX January $9 Call @$4.00 or less

 


Risk Rating: 2.50     (1 = lowest   5 = highest)

Above Break Even Probability: 45%

Max Loss Probability: 15%


 

Profit Mining to Dig for Double

 

Big Three market measures posted New ALL TIME HIGHS last Friday though profit taking sales had the S&P and NDX post lower weekly closes.

 
The KEY REVERSAL top needs to be watched, new highs and lower close, though early indications are this was a function of gravity and straight up stocks needed to come down some.
 
Rotation from triumphant Tech up 20% YTD and S&P plus nearly double digits into undervalued sectors presents another snap back opportunity.
 
The Metal and Mining XME exchange traded fund is essentially unchanged in 2017. 

 

 

Freeport McMoRan could rubber band back from a negative 5% New Year draw down.

 

 

 

FCX had an epic rally run from $4 to $17 before this latest pause.  Midpoint support stands at $10 just below to put reward to risk in favor of the bulls.

 

The one year chart shows a trading channel between $11 and $12.50 for the last six weeks.  This upside breakout targets $14 as the first objective.

 

 

The $14 level also is the halfway mark from the January to June fall.  A push above that retracement resistance sends the FCX stock back to the $17 high.

 

A stock substitution strategy using options ties up less capital and has absolutely limited risk to the premium paid. An option instead of buying the shares also has greater staying power for long term trend development.

An In-The-Money option gives you the right to be long the shares from a lower strike price and costs much less than the stock itself.

The Options Way: Unlimited Upside Potential with Limited Risk.

A Freeport McMoRan long call option can provide the staying power in a potential bullish trend extension.  More importantly, the maximum risk is the premium paid.

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.

Choosing an option can sometimes be a daunting task with all of the choices and expiration months.  Simply put, traders want to buy a high probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so.  In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.  

There are two rules options traders need to follow to be successful.

Rule One:  Choose an option with 70%-plus probability.  The Delta is a measurement of how well the option reacts to movement in the underlying security.   It is also important to buy options that payoff from only a modest price move. 

There is no need to ONLY make money on the all but infrequent long shot price explosions.

Good Options can profit from only modest directional moves.

Any trade has a fifty/fifty chance of success.  Buying options ITM options increase that probability.  That Delta also approximates the odds that the option will be In The Money at expiration.

Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.  
 
With FCX trading at $12.50, for example, an In The Money $9.00 strike option currently has $3.50 in real or intrinsic value.  The remainder of any premium is the time value of the option.

Rule Two: Buy more time until expiration than you may need – even if the move occurs in the next few weeks.  Time is an investor’s greatest asset when you have completely limited the exposure risks. 

Traders often buy too little time for the trade to develop.  Nothing is more frustrating than being right but only after the option has expired premature to the market move.

  

Trade Setup: I recommend the FCX January $9.00 Call at $4.00 or less. A loss of half of the option premium could trigger an exit for more conservative traders.

The $9 strike is below the 52 week low…

An option play also has staying power with the ability to ride through Ups and Downs that would force most stock traders out of the position.

This option also behaves much like the underlying stock with a much less money tied up in the investment. The option Delta is 86%.

The maximum loss is limited to the $400 or less paid per option contract. A stop loss could be placed at half of the premium paid to lessen dollar exposure.

 

 

The upside, on the other hand, is unlimited.

The FCX option trade break even is $13.00 at expiration ($9.00 strike plus $4.00 or less option premium). That is just 50 cents above the current price.

 

If shares just get back to the $17 level, this was a $40 stock in 2014, the option would be worth $8.00 for a 100% return on investment.

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