I did a Q&A for the Invest Answers community today and an incredible question came up. It was such a good educational moment that I wanted to circle back and share it with all of you. Quick reminder before we start. This is not financial advice. I am not a CPA, and I am not a trading adviser. I just never want to miss a chance to show you the power of buying plain stock for the win.
Here is the setup. We are looking at Freeport-McMoRan, symbol FCX, on a 4-hour chart. A trader found what I think is a genuinely beautiful entry, and I want to give them full credit before I say anything else.
They had the range mapped out cleanly. Resistance sitting right at 70, very clearly defined. Support down at 56, tested and held. They waited for a pullback to that support, and they coupled it with a minus 1.8 mean reversion reading. That is exactly the kind of patience I talk about when I teach entries in the Bridge course. You wait for the market to come to your level, you confirm it with mean reversion, and you make sure there is real support under the trade.
So they took the entry at 56. I am rounding. Good level, good confirmation, good read on the range. If you watched MM47 when I capitalized on a pullback, this is the same discipline. They did the hard part right.
But then they reached for one tool that quietly capped their odds before the trade even started, and it is a mistake I see good traders make all the time.
What they actually bought
Instead of buying the stock, they bought a July 70 call for a 6 dollar debit. A far out of the money call, with resistance sitting right at that same 70 strike.
I am not picking on this trader. They saw a perfect trade. They just chose the wrong tool for this particular setup, and here is the math that shows why.
Remember my rule when I buy an option, I want a 3x. So for a 6 dollar call to become an 18 dollar call, I need the intrinsic value to get to 18. A 70 call is worth 18 in intrinsic value only when the stock is at 88. Seventy plus 18 is 88.
So think about what that actually asks for. This trade went on around May 1st, with a July expiration. For that call to hit my 3x target, FCX has to travel from 56 all the way to 88, breaking clean through every bit of that resistance at 70, in about two months. That is a hard bet to make. I would not make it.
The breakeven tells the same story
Even forget the 3x for a second and just look at break even. The break even on a 70 call bought for 6 is 76. That is above all of the resistance we just mapped. So before this trade makes a single dollar, the stock has to punch through 70 and keep going to 76. The whole chart was telling us 70 was a ceiling, and they bought an instrument that does not start working until 6 dollars past that ceiling.
That is the trap with a far out of the money call. You can be completely right about direction and still lose, because you bought something that needs a much bigger move than the one you actually predicted.
The easy bet instead
Now here is the trade I would have made, and it is so much simpler.
Look at where support and the 200 moving average line up. They are both right around 50. So buy the stock at 56, and put a stop loss down at 49. That is risking 7 dollars. My target is the top of the range at 70, and remember, stock has no expiration. I am not fighting a clock. I just need the range to do what ranges do.
Buy at 56, target 70, that is 14 dollars of upside. Risk 7 to make 14. Risking one to make two is a solid risk/reward on a stock trade, and I did not have to break through any resistance to get paid. I only needed the move I was actually confident in, 56 back to 70.
That is the whole point. The prediction was right. The tool just needed to match the prediction.
How it played out
FCX rallied from 56 to 70 in 30 days, from May into June, exactly where they thought it would go. As a stock trade, that took on no heat and simply won. As that July 70 call, it never had a real chance, because break even sat above the very resistance the stock stopped at.
This is really the same lesson as MM6, where I talked about not trading for the sake of trading. Sometimes the right move is the plain one. If you cannot find an options trade with a risk/reward that makes sense, do not force an option onto the chart. I trade stock all the time, and I make money trading stock all the time. When you see a clean setup and you can say, I can buy this at 56, I think it runs back to 70, and I only have to risk 6 or 7 dollars to find out, that is a phenomenal trade. Buying calls is a wonderful tool when the setup fits it, and I cover exactly when it does in Course 101. This setup simply was not one of them.
So my hope is that you walk away from this one open to buying stock when the options just are not lining up. It is not a lesser trade. Sometimes it is the win.
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