I Won't Give Up On Freeport McMoRan, Option Trade On Western Digital

 |  Includes: FCX, WDC
by: Dark Horse Traders' Hedge

When I look into your eyes

It's like watching the night sky

Or a beautiful sunrise

There's so much they hold

And just like them old stars

I see that you've come so far

To be right where you are

How old is your soul?

I won't give up on us

Even if the skies get rough

I'm giving you all my love

I'm still looking up

And when you're needing your space

To do some navigating

I'll be here patiently waiting

To see what you find

Jason Mraz

Freeport-McMoRan Copper and Gold, Inc. (FCX) was originally added for long exposure on March 19, 2012, and the put option rolled to Aug $40 on May 18, 2012. Timing is the key question when it comes to owning FCX because the company should benefit more than the underlying commodity when Copper and Gold rise. "There's so much they hold," and the CEO recently indicated that while there is a slowdown in China, they haven't see it as much in Copper as other areas. Our strategy has been to add ½ of the shares we would like to own on March 19 and sell option premium to enter the second ½ shares at a lower net price. The current Aug $40 put expires on Friday August 18, 2012 and "I'm still looking up" at the $40 strike. I am recommending rolling the put to Nov $40 for an additional $0.85 in premium. In other words, we sold the Aug $40 on May 18 for $8.20 and can buy to close that position today for $4.60 ($3.60 profit) and sell the Nov $40 put for $5.45.

There are many reasons to "be here patiently waiting, to see what (they) find." FCX is the world's largest low-cost producer of Molybdenum, and it is ramping up to produce 20 million pounds in 2013. FCX also expects Copper production in North and South America to reach $3.5 billion pounds by 2016. Once China consumes the above-ground excess and gets a handle on the slowdown, Copper should move higher in price and reward shareholders of FCX. "We won't give up" and believe that FCX provides the Dark Horse Traders' Hedge with the proper exposure to commodities that should go higher.

Western Digital Corp. (NYSE:WDC) was recommended for long exposure in the same March 19, 2012 article with FCX. "It's like watching the night sky, or a beautiful sunrise" as we worked our way into the WDC position, currently trading at $44.30 today, with a cost basis of $32.22. On a relative strength basis, the stock is a bit overbought. I like to sell short term call premiums during periods where the RSI-5 is well above the 70 line. With that said, I am recommending selling the Sept $46 call for approximately $1.29.


Buy to close FCX Aug $40 put

Sell to open, FCX Nov $40 put (FCX121117P00040000) for approx. ($5.45)

Sell to open, WDC Sept $46 put (WDC120922C00046000) for approx. ($1.29)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.