Thursday, December 2, 2010

High Risk Income Play FCX

Freeport McMoran, symbol FCX, is a very volatile stock that has provided me and in the past my clients with a lot of income. Admittedly we got lucky and did not own it during 2009 when it did not pay a dividend. 

Currently FCX pays $1.20 per share which is a yield of 1.14%. Earnings are $8.18 and the debt to equity ratio D/E ratio is a mere .41. So on fundamentals, this company does not meet our criteria as a dividend machine but it does meet my criteria for call income. 

Today I bought FCX at a lofty price of $107.50. I then sold a call with a strike price of $115 which expires in January, 2011 and received $3.50 per share. This means someone thinks FCX which mines, smelts, and refines copper, gold and molybdenum will command a price greater than $115. 

My experience with FCX is that it goes up quick and down quick so I did not want to take a call very far out which is why I picked a January call instead of February which would have paid me $5.15. Note that for those of you who can handle more risk than I can, if you sold the February call you will also get the $.60 per share dividend in February. 

I want them to take my shares. FCX is not a dividend machine so it is okay with me that the buyer of this call takes my shares. These two trades provide an immediate $7.50 on the capital gain plus the call income of $3.50 for a total gain of $11.00 on an investment of $107.50 for a 10.23% gain in just 51 days. Hopefully, the value of hard assets will continue to be strong and I can put that money in the bank. 

Very Truly Yours,