OIL”S WELL PLAY
New Trade Alert for (RIG)
Transocean January 2019 $5.00 Call @$4.00 or less
Risk Rating: 2.5 (1 = lowest 5 = highest)
Above Break Even Probability: 42%
Maximum Loss Probability: 13%
Bounce from the bottom has Crude climbing with the psychological $50 level not far away.
Energy stocks have suffered with XLE off 14% in 2017 compared to the S&P 500 nearly double digit pop.
A low priced stock that has lost its luster ala Bulls Eye Option SunPower 56% winner in a month…presents long term value opportunity.
Most of the Oil price decline is the global production jump with U.S. Oil rigs coming online after the 2016 slide shut down.
24 of the last 25 weeks have seen rig counts rise according to Baker Hughes industry numbers.
Forgotten in this fact has Transocean left for nearly dead on a drop from over $100 per share.
Action over the last two years in RIG has seen a double bottom just below $8 and MAJOR BULLISH DIVERGENCE.
Recent lows did not see new highs in volatility to tell us that sellers may be tired.
Transocean has tracked from $8 to $10 for over a month with $12 the first target on a breakout of this bottom range.
The RIG June 21st bottom at $7.67 coincides with the February 2016 low.
Risk reward favors Bulls at these discounted levels.
Only a close below the $7 on a weekly basis would negate this bullish buying premise.
The Options Way: Unlimited Upside Potential with Limited Risk.
A RIGlong 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.
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 RIG January 2019 $5 Call at $4.00 or less.
This option strike gives you the right to buy the shares at $5.00 per share, a price level not seen in the last 20 plus years, with absolutely limited risk.
The double bottom stands at $7.67.
The January option has ONE YEAR and six months for BULLISH development. An 85 Delta on this strike means the option will behave much like the stock.
NOTE THIS 2019 OPTION WAS ONLY $50 more than Jan 2018
The option upside is unlimited.
The RIG option trade break even is $9.00 at expiration ($5.00 strike plus $4.00 or less option premium). That is 75 cents above the current price.
The measured move target at $12 would see option value at $7 for a 75% gain…