Saturday, January 22, 2011

High Risk Trade Freeport McMoran a follow up

December 2, 2010 I profiled a trade in Freeport McMoran symbol FCX. We bought at $107.50 then sold a $115 call. We hoped our option buyer would take our stock today for a swift gain. Check out the original post on FCX.

This is follow up to see how we fared.

FCX is a miner of gold, copper, silver and some other minerals like molybdenum. FCX hit a 52-week high of $122.69 on January 12, 2011. Although the person who bought our call could have bought our stock at $115 at any time before today 1/22/2011 and sold it at the market on 1/12, they did not. Their gain would have been $122.69 less their cost of $115 less the call option premium they paid us of $3.30 for a total gain of $4.39 per share. I can only surmise that this meager gain of 3.7% was not enough for them.

A few days ago, FCX reported increased per unit costs and forecast weaker volumes during 2011. This news amid a mild general market correction sent FCX shares down to a closing price of $108.40 on Friday. The call expired and we still own FCX.

Where do we stand and what should we do? Should we sell? Should we hold? Should we buy more?

Our costs basis is $107.50 less the $3.30 premium we received when we sold the call or $104.20. In addition, since we owned the stock on January 12, 2011 we will receive the quarterly dividend even if we sell it on Monday. The dividend is $.50 per share. Our cost basis with the dividend income is $103.70. If we sell it for any price above $103.70, we make money.

You have a right to be concerned that FCX stock price could slide back down to its 52-week low of $56.71 on July 1, 2010 it is a very volatile stock. You may want to sell and get out of the trade. If I wanted to sell it, I would place a stop at $104.00.

If you want to hold it, as I do, I will wait until the mood changes. Each day I will check again for calls to make money off FCX.

I will not buy more at this time but if the price slips more than 10% below my basis or to $93.33 then I will buy more because I still believe the world needs gold, copper, silver etc. I cannot eat gold, or easily make change therefore; I prefer buying a stock that provides income rather than own the actual metal.

Very Truly Yours,