Other Voices: Looking For A Quick Return On Copper

Investors Alley colleague and options expert Jay Soloff details a potentially quick and lucrative copper trade

By Jay Soloff

Do you have a good handle on simple option strategies that can boost your portfolio returns?. '10 Simple Rules To Trade Options Like A Pro*' from Jay Soloff at Investors Alley is a good quick overview on using option strategies to mitigate risk and enhance returns in your portfolio. These strategies are well suited to high beta sectors like biotech where option premiums tend to be large. The report is now available* free via download HERE

The trade war with China is having far-reaching effects on the market. The impact is being felt across most industries and business types despite trade with China only accounting for a relatively small portion of GDP. It just goes to show how tied into the global economy most US companies are these days.

It’s also very interesting to see how traders are positioning themselves due to or in anticipation of the economic conflict. It’s clear that most of the short-term trades have been bearish (just look at chip makers and agricultural stocks for example). However, in the long-run it wouldn’t surprise me to see investors quietly loading up on good companies which will rebound when the trade war is over.

Of course, trying to time the end of the trade war is probably a fool’s game. Who knows how long this situation will drag on and what the results will be. It’s also impossible to know how the crowd will react to any piece of related news.

As I’ve already pointed out, actual trade with China is not a huge part of our economy. I believe the heavy selling in certain stocks has to do with lowered expectations more than anything. The market doesn’t like bad news in any form.

There is also the issue of interruption of the global supply chain. That may be more of a concern as it isn’t easily quantifiable. For instance, what happens to the US soybean crop if China is no longer a big buyer? It’s not just the farmers that are impacted. Think of the bulk transportation and the storage capacity involved.

There’s certainly more to tariffs than just paying a higher price for goods. The impact may not fully known for some time.

Still, it’s not hard to find some very interesting options trades which are likely related to effects of the trade war. I just came across an intriguing trade in Freeport-McMoran (FCX) a company most certainly influenced by the tariffs. FCX’s main product is copper, and in recent years, China has been the world’s biggest consumer of copper (a big component of industrial production and residential construction).

At least one strategist believes FCX may have limited upside through the summer. The trader executed a large covered call trade, which is moderately bullish for the stock. The trade generates a bit of income while allowing for some upside appreciation in the stock.

More specifically, with FCX trading at $10.28, the trader purchased 350,000 shares and sold 3,500 September 12 strike calls against the stock. The calls were sold for $0.44, which amounts to $154,000 in premium.

This covered call does a few different things. First off, the 44 cents in income provides a cushion down to $9.84 in the share price before the trader loses money. That 44 cents also provides a juicy 4.3% yield over a 4-month period. Annualized, that’s about 13%.

Furthermore, since the 12 calls were sold, there is upside potential in the stock up to $12. That’s an additional $1.72 that can be made, or 16.7%. All told, the covered call can make 21% in 4 months if FCX gets to $12 or above.

You can see from the chart that FCX has clearly not been a favorite of investors. However, this big covered call trade I just described could be a signal that some (likely savvy traders) believe the stock is near a bottom.

Moreover, this is a trade you could easily (and inexpensively) set up in your own account. Almost certainly, any positive news about the trade war will cause an upturn in the stock. And if not, you are still generating a nice yield to hold the shares through the summer.

Tim Plaehn of The Dividend Hunter is now sending out a weekly list of top dividend plays going ex-dividend over the coming week. To get this free list every weekend, just sign up here.

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