Large Freeport-McMoRan Option Trader Betting On 25% Upside

Freeport-McMoRan Inc FCX is up 18.3% in the past three months as the company executes its growth strategy.

After years of underperformance, some large option traders are now betting Freeport-McMoRan’s efforts to improve its balance sheet and position the company for long-term growth are just starting to pay off.

The Trades

On Thursday, Benzinga Pro subscribers received 13 option alerts related to unusually large Freeport-McMoRan trades. Here are some of the largest:

• From 9:48 a.m. to 9:50 a.m. a trader bought 2,682 Freeport-McMoRan call options with a $13 strike price expiring on May 15, 2020 near ask prices ranging from 59 cents to 60 cents. The series of three trades represented a more than $158,000 bullish bet.
• From 9:52 a.m. to 9:54 a.m. likely the same trader bought 3,453 Freeport-McMoRan call options with a $12 strike price expiring on Feb. 21, 2020 near ask prices ranging from 54.2 cents to 56.1 cents. This series of three trades represented a more than $180,000 bullish bet.
• Less than a minute later, potentially the same trader sold 2,301 Freeport-McMoRan call options with a $12 strike price expiring on Feb. 21, 2020 near the bid price at 56.1 cents. The trade represented a $129,086 bearish bet.
• At 9:57 a.m., a trader bought 1,572 Freeport-McMoRan call options with a $13 strike price expiring on May 15, 2020 the ask price at 63.4 cents. The trade represented a $99,664 bullish bet.

Of the 13 large Freeport-McMoRan option trades on Thursday, 11 were either calls purchased at or near the ask or puts sold at or near the bid, trades typically considered to be bullish. The other two were calls sold at or near the bid, trades typically considered bearish.

Why It's Important

Even traders who stick exclusively to stocks often monitor option market activity closely for unusually large trades. Given the relative complexity of the options market, large options traders are typically considered to be more sophisticated than the average stock trader.

Many of these large options traders are wealthy individuals or institutions who may have unique information or theses related to the underlying stock.

Unfortunately, stock traders often use the options market to hedge against their larger stock positions, and there’s no surefire way to determine if an options trade is a standalone position or a hedge. In this case, given the rapid-fire nature of many of the Thursday morning trades, they could easily be one or more institutions trying to disguise large hedge positions.

More Upside Ahead?

Freeport-McMoRan has been focused on its long-term growth plan, which involves increasing underground production at its Grasberg mine, commissioning its Lone Star Arizona project and leveraging technology such as artificial intelligence to improve operating efficiency.

Part of the strength in Freeport shares in recent weeks comes after Bank of America upgraded the stock to Buy and raised its price target from $10 to $14 on Nov. 14. Bank of America said Freeport should benefit from rising copper prices, and investors should expect increased production, lower costs and normalized capital expenditures in coming quarters.

Bank of America said near-term execution risk is already priced into Freeport stock, and a potential trade war deal could be a bullish catalyst.

May 2020 $13 calls were a popular target for option traders on Thursday. With break-even prices above $13.59, the call buyers are betting on nearly 25% upside from Freeport shares over the next six months.

Benzinga’s Take

The majority of the large Freeport option trades on Thursday morning were bullish. The fact that expiration dates on all of them were two to six months in the future suggest they're likely not short-term bets that the bullish momentum in the stock will continue, but rather medium-term bets that the company’s fundamentals will improve.

The stock traded around $11 per share at time of publication.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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