Make This Low Risk Covered Call With Copper Finding a Floor

With all the talk recently about the US (and global) economy possibly headed towards a recession, investors are paying very close attention to economic indicators. It’s not just the most popular factors, like interest rates and jobs. It’s also variables like CPI and oil prices.

Of course, you can’t forget about copper. Copper has long been considered a leading indicator of economic activity because of its extensive use as an industrial metal. It’s popular in construction, electronics, and other industrial applications.

As you may expect, because of the recession fears, the price of copper has fallen quite a bit in recent months. Back in mid-2018, copper was trading for nearly $3.30 per pound. Today, it’s at $2.70. That’s almost a 20% drop.

So what does the options market say about copper? Is there more pain ahead? Or has copper already reached its low point for the time being?

To get a more in-depth analysis of the situation, I took a look at the options activity in Freeport McMoran (FCX). FCX also produces gold and oil, but the price of the stock generally tracks the price of copper, its most significant production asset.

Interestingly, a large covered call trade occurred this past week in FCX, which may imply a floor has been found in copper. Keep in mind; a covered call caps the possible gain on the stock (in this case FCX) in return for income (from the short call). However, it’s not a bearish trade. You are still buying stock in the strategy that you’d like to either see rise higher in price or at least move sideways.

Specifically, this trade involved buying 500,000 shares of FCX at $11.18 versus selling 5,000 12 strike calls expiring August 16th. The calls were sold for $0.21, which works out to $105,000 in premium collected. The yield on the call sale works out to 1.9%. But for just a month’s time. Annualized, that’s 22.8%.

Furthermore, the position can make money on stock appreciation up to $12 per share (because the 12 strike call was sold). That can add another $0.82 to the max gain potential (at $12 or above in the stock at expiration). In total, the trade can generate a 9.2% return (between stock appreciation and yield) in just a month.

I think this a great trade. It’s a high yield trade for something that lasts just a month, plus it offers upside potential at the share price. What’s more, I believe there is a floor in the amount of copper since it’s already dropped quite a bit in recent months.

It also won’t require a lot of capital to do in your account with FCX trading at only $11 per share. Remember, you need to buy at least 100 shares of stock to sell a call against it. That means you can make this trade for a minimum of $1,100. That’s a very reasonable entry point for a low risk covered call trade that will yield almost 2% in 30 days.