McMoRan Exploration Co. (MMR) is a reasonable, low priced stock that is presenting an opportunity for a low risk trade that is actionable in the right here right now scenario, but should also be safe in the event of an overall market pullback. This options trade gives a wide berth for a pullback - the stock would have to fall 30% before there is a chance of assignment - an event I would actually welcome as I'd love to own the stock at much lower prices.
MMR is engaged in the exploration, development and production of oil and natural gas in the shallow waters (less than 500 feet of water) of the Gulf of Mexico and onshore in the Gulf Coast area of the United States. McMoRan's oil and gas operations are conducted through McMoRan Oil & Gas LLC (MOXY), its principal operating subsidiary. The Company has acreage positions in the shallow waters of the Gulf of Mexico and Gulf Coast areas. Source
MMR has a market cap of 2.13B and while quarterly growth year over year declined 43% it does have positive revenues of $461 million as of the end of Q2. There are 161 million shares outstanding of which 45% are held by institutions. A positive data point is that it has a high short ratio - as of July 31, 2012 there were 23.5 million shares short which equals a short ration of 7.40. For our trade this is a bonus as there is a reasonable chance for a short squeeze, with basically no change between the amount of shares short month over month. MMR reports earnings on October 15, 2012.
Let's jump right into the chart:
This is a weekly chart of MMR and the blue line across this chart represents support & congestion dating back to 2009. The congestion was cleared in January 2010 and has not dipped below since. This is a 2 year support line, and it's not likely to be breached easily. The support line is at $8-$9.
This monthly chart shows a very bullish picture - the stochastics are on a buy signal with black over red, the MACD histogram is stair-stepping up, and the price has recently cleared its 20 & 50 monthly averages. The 20 monthly EMA is trying to return to its' proper position above the 50 EMA, this cross will cause a technical buy signal and moving average trend traders would again be interested creating more volume in the stock.
This daily chart is the actionable time frame:
The daily chart is toppy and subject to a shallow correction before it has enough energy to move forward, therefore I favor a cash backed put position (short put/naked put) to exploit this event.
There are no October options for MMR, and there is no premium in the September 9 puts, therefore I like the November $9 puts for a credit of .50 or more. NOW HERE'S THE KEY: WAIT FOR THE PULLBACK TO PUT ON THE TRADE! If you wait for the pullback - just a few days you substantially increase your odds of collecting more premium for your put. If you jump on this immediately with a .50 credit, your ROI should be around 5%. Remember, even though the premise is that MMR will not return to $9 before the November expiry, you are obligating yourself to be put the stock at $9. For each contract sold you will by tying up $854 in buying power. Probability of these expiring worthless is very high, but as a good risk manager you must use proper position size. Don't get lulled into feeling overly safe as we all know this market can turn on a dime.
You can easily tailor this trade to your own risk tolerance - you can go higher and get better premiums - but the intent of this trade is to avoid getting assigned by taking the lowest strike I can at the best premium available.
Disclaimer: MSCM and/or I may or may not have a position in this stock which may or may not be exited without advance notice. Data is provided for informational and educational purposes only and is not offered as investment advice. Timing of transactions can be critical to the success of a position. MSCM, its employees or owners shall not be liable for any errors or delay in the content, or for any action taken in reliance on any content provided within. Opinions expressed here are the sole opinions of the author and not representative of any firm view.
Disclosure: I am long MMR.