One of the companies that could be impacted the most by semiconductor shortages and potential derailing of the global housing market is Freeport-McMoran Inc (FCX). The stock has been sliding and following the pathway of one of its biggest products in copper. Copper was able to find a little price support intraday but finished virtually unchanged for the day. The lack of bullish direction apparently didn’t dissuade call buyers from piling in today.
FCX and Copper Prices
In the chart below, you’ll see a price chart of FCX (purple) and the futures contract for copper (/HG). You’ll see how similar the price movements are. As you look at the correlation study below, you’ll see long periods with a correlation coefficient over 0.50. Most of the time, the correlation of FCX is over 0.75.
This is a good indication that FCX will go with copper prices, which is a key part of their business. However, a bullish trade would be premised on the resolution of many of the current risks surrounding copper demand. With all of the expected increase in supply of electric vehicles, the potential fall-off in housing demand may not be all that impactful.
FCX Option Activity
The call option activity today was over two times the average and finished with a put/call ratio of 0.40. The call volume was pretty evenly split between being filled at the ask, bid or in between the market. However, that makes sense when you see the long call vertical that was placed. Here’s a breakdown of the significant activity:
- 38,000 17 DEC 21 $33 calls BOT mostly in 1 print @ $1.91 to $2.00
- 38,000 17 DEC 21 $40 calls sold mostly in 1 print @ $0.49 to $0.56
This trade reflects a bullish bias since the lower strike price at $33 was bought and the higher strike @ $40 was sold. Since it was for the same month, it’s referred to as a long call vertical and will reach maximum gain if the price closes above $40 by December’s expiration. The cost of the trade was around $1.50 with a maximum gain of $5.50 per share or $550 per contract.
FCX Technical Analysis
As you can see on the chart, FCX is backed up against a wall of support near $30. This level is significant for the price as it is potentially forming a head and shoulders patter going back to earlier this year. A weekly close below $30 could mean a larger retracement is in order.
Looking at the price in the most recent selling period over the past week, you’ll see the high volume as the price was falling. That high volume continued the past two days, but the price was able to post more neutral candles. This neutral candles at support with high volume reflects the indecision or balance that is forming around this level. This is only contributing to its significance.
Conclusion
Today’s option trade in FCX is a good representation of it’s fundamental and technical picture. The price is down but I’m sure many expect that it is not out. Placing a low risk and high reward trade allows a trader to capture the upside if a big move occurs by December while taking a limited amount of risk to do it.
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