Monday, January 26, 2015

FCX: Volatility play

Update Feb. 7, 2015: FCX expired out of the money on Feb. 7 for maximum profit.

The stock price declined by -2.9% over the 12 days I held the bear position, or a -87.8% annual rate. My options produced a 100% yield on debit, for a +3,042% annual rate.

The global copper, gold and fossil fuels company Freeport-McMoRan (FCX), headquartered in Phoenix, Arizona, publishes earnings on Tuesday prior to the openig bell.

FCX has Weeklys among its options inventories, and I shall trade the FEB1 series of options, which trades for the last time on Feb. 6, 12 days hence.

[FCX in Wikipedia]



Implied volatility stands at 56%, in the 78th percentile of the range of the prior rise, from 42% on Jan. 8 to 60% on Jan. 14.

Ranges implied by options and the chart
until expiration 11 days hence
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

Click on chart to enlarge.
FCX at 10:40 a.m. New York time, 30 days hourly bars
FCX hit a post-recession high in 2010 and has been on the decline ever since, with the most recent and sharpest leg of the decline having begun in July 2014.

The most recent decline of smaller degree within those larger movement began on Jan. 9 and ended on Jan. 14, and included an 8.5% opening gap to the downside.

From the Jan. 14 low, the price retraced nearly 50% of the decline, up to $20.56, then resumed its downward movement. It has not yet attained a lower low below $17.85, a level required to confirm that the downtrend is still in force.

However, the stock is presently in a downtrend or a downward leg n all degrees stretching back to 2010, creating a strong bias toward a bear position.

However, although Zacks Investment Research gives FCX a neutral rating, anaylsts following the stock are in aggregate positive about its outlook, producing a 37.5% enthusiasm rating. However, enthusiasm for FCX is also on the decline, down by 15.8 percentage points in the past month.

The Trade

Given the cast of the downtrending chart and the decline in analyst enthusiasm, even if it remains positive on balance, I'm inclined toward a bear trade on FCX.

Bear call spread, short the $00 calls and long the $00 calls
sold for a credit and expiring Xxx. 00
Probability of expiring out-of-the-money


The risk/reward ratio stands at 7:20. The position places all of both the chart range and the one standard deviation range within the zone of maximum profit.

Decision for My Account

I have opened a position in FCX, as described above.

-- Tim Bovee, Portland, Oregon, Jan. 26, 2015


My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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