Friday, November 28, 2008

Freeport McMoran - a current play

Freeport McMoran (stock ticker: FCX) is a large multinational blue chip mining company that focuses on copper, gold, molybdenum and silver. It often leads the mining sector on the way up. Like most mining stocks this fall, it got absolutely taken to the woodshed and beaten to a bloody pulp. Because it has a large copper component, I don't like it for a long-term play, but it is a current trade of mine to play the bear market bounce and it has a margin of safety fundamentally because it also mines gold.

UYM, the ticker for an ETF in the basic materials sector, is a more diversified way to play this bounce and gives you 2:1 leverage while trading like a stock. However, FCX has fairly liquid (i.e. heavily traded) options, which give more like a 3:1 or 4:1 leverage, so I am using options on this stock as a trading vehicle. There is a decent precedent for the current bounce in FCX that I am using as a road map to help make trading decisions. Following are my thought processes related to this FCX trade.

First, the current chart:

What I think will happen next, based on the prior "crash" in the stock in 1997:

Again, what makes the current opportunity so exciting is that it should only take a few months to make over a 100% return (200-300% with options) from the current levels. Due to impatience and my love of the game, I actually plan to sell my options when we reach the 50 day moving average, then buy new ones all over again two weeks later on the pull back. Again, this is a trade, not a buy and hold stock, as the copper component means this company won't do as well as "pure" gold stocks and copper stocks generally do quite poorly during recessions.

Remember that some of the greatest short-term opportunities to go long occur during bear markets, not bull markets. Traders love bear markets because of the ability to play the wild swings back and forth and make money both short and long. One need only look at the 2000-2003 bear market in the S&P 500 for a classic example of this phenomenon, where monthly swings gave gains and losses that looked more like annual returns for an unstable emerging market:

Even if you traded poorly during the prior bear market shown in the chart above and only caught half of each swing in each direction, you would have made 80% in 2 years time (assuming no leverage) instead of losing 50% of your money by buying and holding and gritting your teeth and waiting for the market to come back "like it always does" (eventually, anyway).

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