Traders hold a moderately bearish outlook on Freeport-McMoRan

Freeport McMoRan Copper & Gold (NYSE: FCX) endured a rocky session in yesterday’s trading. The shares barreled higher out of the gate, but the bears descended around midday, sending the stock into the red. By Monday’s closing bell, FCX was near its intraday lows, giving back 1.5% to settle at $69.20.

While all of this excitement was transpiring, options players were strategizing with a bear call spread on the copper company. Around 1:30 PM Eastern Time, blocks of 13,500 contracts traded at the March 75 call and the March 85 call. The 75-strike option traded near the bid price, at $2.56, while the 85-strike call traded near the ask price for 57 cents per contract. It appears, therefore, as though the traders sold the closer-to-the-money call and purchased the 85-strike call, collecting a net credit of $1.99 per spread.

This strategy, a short call spread, is also referred to as a bear call spread, as the calls traded are typically out-of-the-money and the trader hopes that they stay that way. The purchase of the upside call provides a bit of protection versus simply selling the 75 call uncovered.

If FCX remains below 75 at March expiration, the investor will keep the $1.99 premium collected. If FCX rallies above breakeven, however ($76.99 in this example – a move of 11.3% from Monday’s close), losses will accumulate until the 85 strike, at which point the maximum loss peaks. Losses are limited to $8.01 per spread no matter how high the stock advances.

By opening a free virtual trading account with OptionsHouse, you can build profit/loss diagrams such as the one above to help visualize the risk/reward dynamics of options trades.

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