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As the price of Gold and Copper goes, so goes the price of Freeport-McMoran's (FCX) stock price. Investing in Freeport-McMoran is a good way to invest in Gold and Copper, or a bad way, depending on the direction of the price of Gold and Copper. As the prices of Gold and Copper have retreated over the last months, so has the price of Freeport-McMoran's stock price as shown below:

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Freeport-McMoran's stock price peaked near $58 early in 2011, and has declined to around the $30 range. The company's stock price is just above its previous support in the $28 range hit in October of 2011. From the chart, Freeport-McMoran's stock appears to have put in a double bottom and appears to be preparing for a leg up in price.

However, in Freeport-McMoran's Q1 2012 conference call held on April 19, 2012, the company indicated China is an important demand driver, as the country continues to build out its infrastructure, with copper being a prime ingredient for the build-out. The company reported the Chinese economy appears to be strong, but recently China cut its interest rates for the second time this year, as the country's economy appears to be in an economic slowdown. If China is able to spur its economy, then Freeport-McMoran's stock price could recover.

In the most recent quarter, the company reported $764 million in revenues. Labor-related work interruptions and temporary suspension of operations negatively affected the production at PT Freeport Indonesia, which was partially offset via higher sales in North America. Additionally, the company emphasized the reduction of debt from $17.6 to $3.5 billion over the last five years. The company also made mention of the fact that the company has $4.5 billion in cash. The company reported Europe was weak, but not as weak as forecast by some pundits. Additionally, the first quarter in the U.S. was strong, particularly as a result of automobile sales.

Freeport-McMoran has potential potholes at every turn with respect to labor and government relations. Freeport-McMoran has a significant portion of its operation outside of the U.S. and has been careful to build strong relationships with the governing authorities in its various geographic locations. But, one political or military coup in one of the countries where it operates, and the company could be dealing with a very large pothole.

Freeport-McMoran's stock has a very nice annual dividend yield of 3.9% which can be combined with stock options in order to position for a supercharged potential return and protect the position from any potential potholes. A protected covered call or collar is one option method for increasing potential return and providing protection. A protected covered collar may be entered by selling a call option against a stock and using some of the proceeds to purchase a put option for protection or "stock insurance", in case the stock price drops significantly.

Using PowerOptions tools, a variety of protective covered call positions were found for Freeport-McMoran for 2013 January option expiration as shown below:

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The highest potential returning protected covered call has a potential return of 6% (11.5% annualized) and a maximum potential loss of 13.9%, so even if Freeport-McMoran's stock price drops to zero, the maximum loss which can be experienced is 13.9%. Additionally, when taking into account Freeport-McMoran's dividend payments over the course of the protected covered call investment, the potential return is increased to 8.2% (15.7% annualized) and the maximum potential loss is decreased to 12.1%.

The specific call option to sell, for the highest returning protected covered call, is the 2013 Jan 32 at $3.55 and the put option to purchase is the 2013 Jan 26 at $1.63.

Trade

  • FCX stock (purchased or existing)
  • Sell 2013 Jan 32 Call at $3.55
  • Buy 2013 Jan 26 Put at $1.63

A profit/loss graph for one contract of the protected covered call, including dividend payments, is shown below:

For a stock price below the $26 strike price of the put option, the value of the protected covered call remains unchanged (at expiration). If the price of the stock increases to around the $35 range, the position can most likely be rolled in order to realize additional potential return.

Source: Supercharging Freeport-McMoRan's Dividend