Cramer Bearish on Freeport-McMoRan (NYSE: FCX) as the Stock Heads Lower

Last week in an episode of Mad Money, Jim Cramer said that while he likes Freeport-McMoRan Copper & Gold FCX as a company, he would put it on his “sell” list for now. He cited concerns such as exposure to China’s slowing economy or the stock’s recent run. From December 2008 through mid-January this year (14 months’ of activity), the stock gained more than 400%; since another visit to its January peak six weeks ago, the shares have given back roughly one quarter of their value and are below potential resistance at the 200-day moving average.

Investors who agree with Cramer’s bearish remarks but who don’t want to engage in a short sale could consider option trading strategies. Bullish investors, who believe FCX might break out of its recent downtrend, could also look at various option strategies as an alternative to buying the stock outright. Two hypothetical options trades on the stock – one bullish, one bearish – are outlined below. Remember these are merely examples, not recommendations. Consider your own risk/reward parameters and personal trading goals before executing any new trades.

*Prices given as of Monday morning. FCX is trading at $67.01

Bullish Option Strategy: Call Butterfly

FCX bulls could trade a long call butterfly with a few months until expiration. The August 40/70/80 “broken wing” butterfly can be purchased for a net debit of $18.85 by simultaneously trading the following:

• Buy the August 40 call

• Sell two of the August 70 calls

• Buy the August 80 call

If FCX is trading right at the short (70) strike when these options expire on August 20, the trader collects the maximum potential profit of $11.15 (the difference between the 70 and 40 strikes minus the debit paid). Losses, meanwhile, are capped at the premium paid ($18.85) and occur if FCX is trading below $40.

Due to the “broken wing” nature of this butterfly spread, there is only one breakeven at $58.85 (the lower-strike long call plus the debit paid). Anywhere above 80, the trader will earn $1.15, or the maximum potential profit minus the difference between the sold strike and the higher-strike long call.

Profit/Loss of FCX long call butterfly

Bearish Option Strategy: Synthetic Short Stock (Split Strikes)

Expect further challenges and downside ahead? Consider the synthetic short stock strategy, which mimics a short stock play with a twist. Simultaneously buy the January 2011 55 put and sell the January 2011 75 call, collecting a credit of 80 cents per spread. If FCX is trading between the two strikes when the options expire, the trader will keep this credit.

Below 55, gains are unlimited through January expiration down to the zero mark. Above 75, on the other hand, losses are theoretically unlimited above breakeven of $75.80. Due to this dramatic risk/reward profile (similar to a short stock play), synthetic trades need to be closely watched and managed with caution.

Profit/Loss of FCX short synthetic

Have questions about margin, ACATs, or trading levels? Join Jared Levy and Bryce Bruner tomorrow (May 25) for a free “Brokerage Basics” webinar.

Photo Credit: Neeta Lind

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