Options Traders Hedging Their Bets on Copper Miners

Freeport McMoRan Copper (FCX) – Shares in the world’s largest publicly traded copper company rebounded 3.7% to $118.60 after declines earlier in the week on labor issues and concerns of a slowdown in Chinese demand owing to prohibitively high copper prices.

The 10,000 lot position in the January contract that we observed earlier today appears to have involved the sale of 110 puts for $15.43 and the purchase of 130 calls for $13.60. This suggests a short collar strategy employed by a trader with a short position in the underlying stock who wants to protect the position against an unexpected move higher. The purchase of the out-of-the-money call is funded by the sale of the out-of-the-money put – and in this case the trader even pockets a $1.83 credit on the transaction.

Shares of Freeport McMoRan have risen 64.5% over the past year, trading as low as $70.94 and as high as $118.65 during that time.

Ivanhoe Mines (IVN) – Meanwhile, shares in Ivanhoe Mines, which is active in copper, gold and coal mining in Asia, recovered nearly 2% of their value, fresh off yesterday’s declines on the announcement of a $7 million investment to boost its share of Australian copper explorer Exco Resources Ltd. [ASX: EXS].

The 8-fold increase in option trading volume we observed today appeared localized in January 15 calls, these more than $5 out-of-the-money, which traded to the middle of the market for $1.05. It seems well within the realm of possibility that an option trader decided to sell those 25,000 calls against an underlying share position, taking advantage of a 23% increase in the premium attached to that strike on back of the share price movement, and well aware that Ivanhoe shares have tested the $15 level on just two occasions in the past 52 weeks before falling precipitously again.

Ivanhoe Mines traded past the $17 level in July 2007 and again in November – the setup for a similar rally was observed in late February, but Ivanhoe’s share stalled at $13 and took another nose lower. The trader in this case may be betting that a year-end rally in Ivanhoe, like a carnival hi-striker, will fall short of the January strike price, allowing him or her to pocket the premium risk-free – or, if exercised, hand over the underlying shares at a generous premium to current levels.

Comments

[NOWHEREMAN:]

Ivanhoe has a problem...The Mongolian Government is vacilating on the multi-billion copper project...trying to get as much as they can in royalties...the decision may take a year or longer...

But they have an under the radar coal subsidery on the Pinks...SouthGobi...wh... has doubled in the last year...and has a railway directly to china...Buy and hold IVN based soley on SouthGobi.

2008 May 10 03:05 AM