Shares of mining giant Freeport-McMoRan have nearly doubled in 2016, and are up some 275 percent from their late-January lows, thanks to a major rebound in commodity prices.
And that run has been great news for options trader Andrew Keene of AlphaShark Trading, who was able to cash in big-time on the S&P 500's third-best performer.
Back on Jan. 26, when Freeport shares were just below $4, Keene said that stock "has bottomed," and that he expected it to make "a move higher."
In order to cash in on such a move, Keene bought the 5-strike call and sold the 8-strike call, both expiring in January 2017, spending $0.60 per share on the call spread.
Since a call offers its owner the right, but not the obligation, to buy a stock for a given price within a given time frame, purchasing the spread gave Keene the right to buy Freeport shares for $5, but also gave someone else the right to buy the shares from him for $8. That means that the spread has a maximum value of $3; if Freeport is trading above $8 at expiration, Keene will exercise his right to buy the shares for $5, but will be forced to sell the shares to someone else for $8 — allowing him to pocket the difference between the prices. Maximum profit, in this case, would be $3 minus the $0.60 he paid for the call spread.
Keene turned out to be not nearly bullish enough. The stock zoomed through his $8 target at the beginning of March, rising as high as $16.42 around Thanksgiving, before falling back to $13.20 on the last trading day of the year. Still, assuming Freeport remains above $8, he will be able to turn a 400 percent profit on the trade.
The potential for such an attractive payout is "why I used the options market," Keene said Thursday on CNBC's "Trading Nation."
Of course, had Freeport shares failed to rise, the $0.60 he paid would have been entirely lost.