Friday, January 28, 2011

Sold Freeport-McMoRan Copper and Gold Inc. 100% Cash-Secured Put Options

Today, two Freeport-McMoRan (FCX) 100% cash-secured put options were sold in the Covered Calls Advisor Portfolio. The transaction was as follows:

01/28/2011 Sold 2 Freeport-McMoRan Copper and Gold Inc.(FCX) Feb2011 $110.00 Puts @ $6.35
Note: the price of FCX stock was $106.10 when these puts were sold.

Establishing these in-the-money puts reflects this advisor's bullish sentiment for FCX. The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the two put options sold.

This is the first 100% cash-secured put position established in the Covered Calls Advisor Portfolio. As you might recall from this article (link), this advisor has a personal preference that favors covered calls over cash-secured puts, despite the synthetic equivalence of these two strategies if they are established at the same moment in time, at the same strike price, and for the same expiration date. In this instance, the cash-secured put was selected primarily as an experiment to see if any additional insights are gleaned when comparing the covered calls versus cash-secured puts investing processes.

Freeport-McMoRan Copper & Gold is the world's second largest copper producer and is a major producer of gold and molybdenum. FCX has producing mines located in Indonesia, North America, South America and Africa. Copper production totaled 3.9 billion pounds in 2010, versus 4.1 billion pounds in 2009; and gold production totaled 1.9 million oz., versus 2.7 million oz. in 2009. Molybdenum production was 72 million pounds in 2010, versus 54 million pounds in 2009. In 2010, North America accounted for 28% of copper output, versus 28% in 2009; South America 34% versus 34%; Indonesia 31% versus 34%; and Africa 7% versus 4%. At year-end 2010 (on a preliminary basis), consolidated proven and probable reserves totaled 120.5 billion pounds of copper, 35.5 million ounces of gold, and 3.39 billion pounds of molybdenum. Some 27% of FCX's copper reserves were in Indonesia, 31% in South America, 35% in North America, and 7% in Africa. About 95% of FCX's gold reserves were in Indonesia, with the balance in South America. Some 81% of molybdenum reserves were in North America, with the remainder in South America. Freeport-McMoRan Copper & Gold Inc. was founded in 1987 and is headquartered in Phoenix, Arizona.

Freeport-McMoRan ranks very highly on the Covered Calls Advisor's "Buy Alerts" scorecard shown below. The total points of 20.68 is well above the required total points threshold of 16.0 for a new investment.

Note: For expanded view, left click on the spreadsheet above.

Two possible overall performance results(including commissions) for the Freeport-McMoRan Copper and Gold Inc.(FCX) transaction would be as follows:
100% Cash-Secured Cost Basis: $22,000.00
= $110.00*200

Net Profit:
(a) Options Income: +$1,259.55
= ($6.35*200 shares) - $10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $106.10 and thus stock assigned at $110.00 at expiration): -$788.95
= ($106.10-$110.00)*200 - $8.95 commissions
(c) Capital Appreciation (If FCX stock above $110.00 at Feb2011 expiration): -$8.95 = ($106.10-$106.10) -$8.95 commissions
= ($29.00-$28.15)*700 - $8.95 commissions

Total Net Profit(If stock price unchanged at $106.10): +$470.60
= (+$1,259.55 +$0.00 -$788.95)
Total Net Profit(If stock price above $29.00 at Feb2011 options expiration): +$1,250.60
= (+$1,259.55 +$0.00 -$8.95)

Absolute Return if Unchanged at $106.10: +2.1%
= +$470.60/$22,000.00
Annualized Return If Unchanged (ARIU): +35.5%
= (+$470.60/$22,000.00)*(365/22 days)

Absolute Return (If stock price above $29.00 at Feb2011 options expiration and put options thus expire worthless): +5.7%
= +$1,250.60/$22,000.00
Annualized Return (If stock price above $29.00 at expiration): +94.3%
= (+$1,250.60/$22,000.00)*(365/22 days)

The downside breakeven price at expiration is at $103.65 ($110.00 - $6.35). The corresponding probability of profit (if held until Feb2011 options expiration) for these FCX 100% cash-secured puts is 61.3% versus 51.2% for a buy-and-hold of Freeport-McMoRan stock over the same timeframe.

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