Material stocks continue to outperform and Freeport McMoRan is among the leaders. A bullish diagonal spread on FCX stock offers a favorable risk to reward trade to take advantage.
Diagonal Spread On FCX Stock
With inflation hitting its highest levels in nearly 40 years, cyclical stocks are getting renewed attention.
FCX stock was up 7.2% yesterday after recently climbing back above its 50-day line this week. The copper miner is ranked No. 9 in its group and has a Composite Rating of 92, an EPS Rating of 73 and a Relative Strength Rating of 91.
A diagonal spread on FCX stock could nail a nice profit without risking too much capital. To set it up, you buy a long-term call option and sell a shorter-term, further out-of-the-money call option. Here's a setup on FCX stock to illustrate.
FCX stock closed at 43.56 yesterday on its way to a 52-week high around 46. If you have a price target of 46, you could place a bullish diagonal spread at that price.
Start by selling the March call option with a 46 strike. It generated around $160 in premium yesterday. At the same time, you buy the 39-strike call option expiring in May. That would cost you around $685.
With the short call offsetting some of your cost of the long call, the entire spread costs $525. No matter how much you're wrong, that's the most you can lose on the trade.
Profit And Loss Levels
What about profit? The estimated maximum profit is around $550. Why an estimate? Changes in implied volatility can also change your profit levels. The maximum profit occurs if FCX closes right at 46 on March 18.
The idea with the trade is that if FCX stock trades up to around 46, the diagonal spread will increase, resulting in a net profit.
A bullish diagonal spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn't pan out.
The combined position has a net delta of 33, which means the trade is roughly equivalent to owning 33 shares of FCX stock. This will change as the trade progresses.
A suggested stop loss level is a close below 40 on FCX stock. That's right around the price of its 50-day moving average line
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
