[Options] Putting Time on Our Side

Sean McLaughlin
April 1, 2024

Steve Strazza brought up charts of the energy, materials, and commodities sectors on today's Flow Show. These are "peer indexes," meaning they often trend together.

And the current trends suggest we need to add more bullish positions in these areas.

The one name that stood out the most was Freeport McMoRan $FCX:

But given the run we've already seen here, we need to allow for the possibility of some digestion which may put a governor on the speed on any breakouts from here.

To position ourselves for this possibility, we're going to utilize a Call Calendar spread.

Here's the Play:

I like buying a $FCX May/January 55-strike call calendar spread for an approximately $3.65 net debit. This means I'll be long the January 55 calls and short an equal amount of the May 55 calls. And the debit I pay today is the most I can lose in this trade. (Using regular monthly expiration options)

But I'll be mindful of an uncommon feature of calendar spreads: if I'm right in the direction but the stock overshoots quickly in my favor, I could actually lose:

If I'm still holding short calls at the 55-strike, my profit potential begins to decline above $55 and if it goes too far, I could actually lose.

Up top, I'll say any closing price below $44 per share invalidates this thesis and I'll exit the entire trade and book my likely loss.

With this in mind, here's how I'm going to manage this trade:

As long as $FCX is below $52 per share, I'm going to look for opportunities to roll my short calls for additional credit which reduces my total risk in the campaign. If/when the short May 55 calls are offered at or below 25 cents, I'm going to "roll" these calls into June 55 call options for a net credit (this means I'm simultaneously buying-to-close my short May 55 calls and selling-to-open the June 55 calls). The amount of credit I receive for this roll will depend on how close we are to the 55 strike (the closer, the better).

I'll continue repeating this process every time my short calls are below 25 cents in value - as long as $FCX is below $52. If $FCX is above 52, then I want to let these calls expire worthless and then just hold the long January 55 calls with unlimited upside potential.

So, if $FCX stays below $52, but doesn't trigger my stop at $44.00, then I'll keep rolling the short calls for credits every month until the January calls expire.

But if at any time $FCX trades to/through $55 per share while I'm still holding short calls, then I'll close the entire spread for whatever credit I can receive. In all likelihood, we'll be exiting a winner.

If $FCX follows through and we're just holding the long January 55 calls, then I'll just hold on for a potential rocketship ride!

As always, I'll keep ASO members appraised of any short option rolls or adjustments as they are made in our live chat room and we'll cover them in our weekly Jam Sessions.

I know there's a lot to digest here, so if you have any questions on this trade, please send them here.

If you missed my most recent ASO video Jam Session, you can catch a replay on Stock Market TV.

~ @OptionsSean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7910.

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