Freeport-McMoRan stock displays close to the highest level of implied volatility seen for this stock in the last 12 months.
That usually suggests a time to collect rich premiums by selling options. Option traders can take advantage of that high volatility by selling what is known as a "short strangle," which involves selling an out-of-the-money put and an out-of-the-money call within the same expiration date.
This trade generates a large amount of premium for the option seller, but it does come with risks. A short strangle is an unprotected trade, sometimes referred to as a "naked" trade. Naked options can be risky. They expose the trader to potentially unlimited losses if the stock makes a big move.
However, if the investor is right and the stock moves sideways, the trader gets to keep the full premium.
How The Short Strangle Works With Freeport-McMoRan Stock
Assuming a trader believes Freeport-McMoRan stock will trade sideways over the next few weeks, they could look to sell an April 17 put of 39 and an April 17 call at 43. The 39-strike put could be sold for around $1.05 and the 43-strike call could be sold for around $1.00.
Selling those two options would generate a total of $205 in premium. That is the maximum possible gain on the trade if Freeport-McMoRan stock closes between 39 and 43 on the day of expiration.
To work out the break-even price of the trade, take the lower strike price of 39 minus the total premium received of $2.05 which gives 36.95. Then on the call side, take the call strike and add the premium which gives 45.05.
This trade is a known as a short vega trade, which means if implied volatility increases early in the trade, losses could occur.
Potential Losses Unlimited — And Higher Than Gains
Short strangles are an advanced option strategy, so if all that sounds confusing, it's best not to trade them. With a trade like this the potential losses are unlimited and a lot higher than the potential gains, so traders would want to be very confident that the stock is going to remain flat over the course of the trade. A stop loss could use the short strike prices as areas to exit the trade.
According to the IBD Stock Checkup, Freeport-McMoRan stock is ranked number 10 in its group and has a Composite Rating of 54, an EPS Rating of 71 and a Relative Strength Rating of 33.
Further, Freeport-McMoRan plans to report earnings in late-April, which means no earnings risk. But please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, and is very conservative in his style. He believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
