The Copper Producer (FCX) PUT Play

[Asuqytrau]

We’re going to start by closing out a couple of trades.


Let’s look first at a long PUT position we opened just a month ago in a letter called Silver Headed to the Bargain Basement (http://oakshirefinancial.com/2013/03/11/silver-slv-heading-to-the-bargin-basement/).

In that missive, dated March 10th, 2013, we libelled silver in a most callous fashion, saying –

[Attaxargo]

Since our recommendation (in red circle), SLV dropped by as much as 9% before recovering somewhat in last Friday’s trading session. The fall came on a reasonable pickup in volume (black circle) and pushed the stock’s Relative Strength Indicator (RSI) near enough to an extreme oversold level for us to shout “uncle!” and decide to close the trade (in blue at bottom).

But isn’t there more downside for silver?

It’s likely there is, but in the meantime, it appears we may be in for a bounce, however transient, and that in itself is reason enough for us to cash out.

The longer term picture for silver, of course, is still weak. The failure last week to hit the RSI 20 line, the lack of a clear volume climax and the continuing decline of all the major moving averages speaks of a stubborn bear.

We bought the SLV October 26 PUTS for $1.09 and they’re now going for $1.55. That’s better than 42% in a month (500% annualized – if you care to play that way) and because we’re expecting some near term strength, we’re gone.

[Augusttela]

Our next trade on the docket was opened two weeks later, on 25 March, in our letter entitled When the Leaders Start to Lag (http://oakshirefinancial.com/2013/03/25/when-the-leaders-start-to-lag-dia-iyt-and-lqd-oh-my/#comment-176267).

There we pointed to the wide disconnect in the relative performance of the Dow Jones Industrials and the DJ Transports over the last six months, but in particular since the mid-November bottom.

We wrote:
Where the Dow gained 7%, the transports were up by almost 25%. … [yet] with both RSI and MACD diverging lower against price and the recent 80+ overbought reading of late January, we believe IYT’s momentum is now breaking.
​

We put on a zero premium pairs trade pitting IYT against DIA, two ETFs that serve as proxies for the old Dow indexes. We bought and sold PUTS on the two for the same price, so we paid only the cost of commissions to initiate.

[Avangerel]

We believe there could be a further tightening of the gap over the mid- to long-term, but like SLV, we could see a bounce here that erases our gains and forces us to wait Lord knows how long before we get another chance to cash out.

Part of what makes us believe that might happen is to be found on last Friday’s chart

Here’s what both the Dow and Trannies did on that day –

[admin]

After falling 2% at the open, the Transports turned around and pulled off a wild comeback, ending higher on the day by a half percent.

The Industrials were down less and rebounded less, falling 1.2% before recovering to post just a quarter percent loss.

But the day?s action is significant.

Our take is like this:

There?s likely more immediate upside awaiting for both the Dow and the Transports, with the latter probably the recipient of an especial blessing. We stress that Friday?s action speaks only to the immediate future ? say, between a day and a week ? and after that, it?s anybody?s guess as to where we?ll be heading.

And it?s for this reason that we strongly suggest you close out the trade.

The IYT PUTS are now trading for $4.80. The DIA PUTS are fetching $3.50. Your take for closing out (selling off the IYTs and buying back the DIAs) is $130 for every pair traded.

Considering the current market structure, we feel it would be a wise move.