HOT SUMMER…COLD WINTER…
New Trade Alert for (DM)
Buy Dominion Midstream February $12.50 Call @$3.75 or less
Risk Rating: 3.0 (1 = lowest 5 = highest)
Above Break Even Probability: 44%
Probability of Max Loss: 24%
Energy sector woes have everybody watching Crude Oil post multi month lows. Interesting fact that stock market remains solid… up near the ALL TIME HIGHS even without Energy participation.
When Crude and Natural Gas stop going down and stabilize that can be the next catalyst for the Macro market rally run.
UNG the Natural Gas ETF declined nearly 20% in the last year.
Dominion Midstream has been hit hard down 50% just a few weeks ago.
Recent price action saw new DM annual lows BUT NO NEW HIGHS in volatility. This Bullish Divergence is a strong signal of a bottom base.
After trading sideways $12.50 to $15 for four months, DM shot up. The rally was short lived and the price pause is another opportunity for entry.
The Options Way: Unlimited Upside Potential with Limited Risk.
A DM long call option can provide the staying power for a market upturn. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months and strikes. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70%-plus probability.
The Delta is a measurement of how well the option reacts to movement in the underlying security.
It is important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent large price explosion.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability.
That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options is more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With UNG trading at $16.00, for example, an In The Money $12.50 strike option currently has $3.50 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need.
Time is an investor’s greatest asset when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop.
Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the DM February $12.50 Call at $3.75 or less.
This option strike gives you the right to buy the shares at $12.50 per share, below DM lows, with absolutely limited risk.
This option strike gives you the right to buy in at a major discount.
The February option has six months for any BULLISH recovery. An 84 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $375 or less paid per option contract. The upside is unlimited.
The UNG option trade break-even is $16.25 at expiration ($12.50 strike plus $3.75 or less option premium). That is just 25 cents above the current Dominion Midstream price.