Thursday, January 27, 2011

Freeport-McMoran Copper & Gold (FCX) - Upisde Skew Creates Vol Diff

FCX is trading $106.98, down 3.0% with IV30™ up 11.9%. The LIVEVOL® Pro Summary is below.


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Freeport-McMoRan Copper & Gold Inc. (FCX), through its wholly owned subsidiary, Phelps Dodge Corporation (Phelps Dodge) is a copper, gold and molybdenum mining company.

I found this stock using a custom scan I built searching for names where IV30™ is up at least 10% today. The scan details are below with a snapshot if you want to build it yourself in Livevol Pro.

Custom Scan Details
Stock Price >= 10
Average Option Volume >= 1,200
Days After Earnings >= 5 and <= 60
IV30™ Percent Change >= 10%
IV30™ >= 10

The goal here is find stocks more than $10, with a greater than 10% rise in IV30™ (short-term implied) that is not due to an earnings date, with enough option liquidity to trade.

The FCX Charts Tab is included (below). The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

IV30™: 40.12
HV20™: 29.74
HV180™: 42.26

IV30™ is rising and is almost as high as the HV180™ (long-term realized) and is well above the HV20™ (short-term realized). The interesting vol actually lies in the skew.

The Skew Tab snap (below) illustrates the vols by strike by month.

I'm interested in that vol difference in the upside skew between Feb and Mar. Finally, let's look to the Options Tab.

Possible Trades to Analyze
1. If you want to bet on a rise in gold and scalp some skew:
Sell the Feb 130 call @ $0.19 (~43 vol)
Buy the Mar 130 call for $0.64 (~38 vol)
Pay $0.45 to own some Mar to Feb and bet that FCX climbs to the $130 range.

2.Similar to #1, but take on more deltas:
Sell 1 Feb 129 call @ $0.22 (~43 vol)
Buy 1 Mar 125 call for $1.11 (~38 vol)
Pay $0.89 for Mar vs Feb and own a $4.00 call spread.

3. Putting on some risk:
Buy 1 Feb 120 call for $0.78.
Sell 2 Feb 125 calls @ $0.39.
Buy 1 Feb 130 call for $0.21.
Pay $0.21. I like this trade for a few reasons:
1. It only risks $0.21.
2. MaxGain is $4.79. This yields a 22.8:1 MaxGain:MaxLoss ratio.
3. Ok, I can't think of a #3...

The PnL chart for this trade is included below. One thing to note - this thing only wins on expo if FCX rallies pretty hard.

This is trade analysis, not a recommendation.

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