Bullish outlook in Freeport-McMoRan (FCX)

The materials sector has been gaining momentum of late, powered higher in large part by a sluggish dollar. Copper has been especially strong, and this backdrop has helped Freeport-McMoRan Copper & Gold (NYSE: FCX) shares. Since hitting a double-bottom around the 66 mark in early February, the shares have expanded more than 20%.

Yesterday, investors who hope this trend will continue bought a chunk of bull call spreads, calling for up to 25% of additional upside between now and mid-May. An hour into Wednesday’s trading day, 6,000 contracts changed hands on the May 90 and May 100 calls. These contracts came across the tape in one lump block and each side was marked as a “spread.”  Open interest expanded at these strikes this morning, affirming that the volume consisted of new positions.

The May 90 call traded near the ask price, for $2.00 per contract, suggesting these positions were bought to open. The other side of the trade (the 100 call) traded for 48 cents, changing hands closer to the bid price and suggesting they were sold to open. The net debit to open the spread trade was $1.52 per spread, or $912,000 for the 6,000-lot.

A bull call spread is often considered a bullish-to-neutral strategy, but as this spread is out-of-the-money by nearly $10 (the strike price of the long call is almost $10 above the stock’s current price), it is relatively bullish in nature. The spread will be most successful if FCX rallies all the way to 100 (or better) by May expiration on May 21st. At this point, the call spread buyer can collect $8.48 per spread, for a whopping return on risk of more than 550%. Anywhere between $91.52 and $100, however, will realize profits. The most the trader can lose is 100% of the debit he paid, or $1.52 per spread.

These returns (illustrated in the profit/loss chart above) have the potential to be realized at expiration. Fluctuations in the stock price, implied volatility, or other factors could place the option in losing or profitable territory long before expiration, prompting an exit from the spread buyer.

To learn more about options strategies that work with your risk/reward profile, consider opening your own free virtual trading account.