Phelps Dodge (NYSE:PD) is engaged in the production of copper, carbon black, magnet wire and continuous-cast copper rod, as well as molybdenum and molybdenum products. The company consists of two major divisions: Phelps Dodge Mining Company and Phelps Dodge Industries. PDMC is an international business division, comprising the company's vertically integrated copper operations, from mining through rod production, primary molybdenum operations through conversion, marketing and sales and worldwide mineral exploration, technology and development programs. PDI is Phelps Dodge's manufacturing division, comprising two business segments that make engineered products for the global energy, telecommunications, transportation and specialty chemicals sectors.
Our hunt for bullish positions was rewarded with little success Monday, despite the extra research time provided by the President's Day holiday. There is simply not much "premium" in options and in the end, our selection of PD was based more on the technical qualities of the issue and also on the broad-market "hedge" potential inherent in the Metals & Mining sector. The stock is currently trading in a range from $90-$100 and while it may be somewhat "overbought" in the short-term, there is room for additional upside activity and a reasonable support area exists near the sold (put) strike at $90. In addition, the underlying industry group is performing well and the trend is expected to continue in the coming weeks.
Traders who enter this position should expect extreme volatility and although the options are very liquid, a (spread) closing order based on the stock may be appropriate to limit potential losses.
PLAY (conservative - bullish/credit spread):
BUY PUT MAR-85.00 PD-OQ OI=3712 ASK=$0.40
SELL PUT MAR-90.00 PD-OR OI=2827 BID=$0.85
INITIAL "NET-CREDIT" TARGET = $0.50-$0.60
POTENTIAL PROFIT (X 5 contracts) = $250
RETURN ON INVESTMENT (max) = 11%
COST BASIS = $89.50
LOSS-LIMIT/EXIT POINT = $93.00 (cons) - $91.00 (aggr)