Going To The Oil Well Again
New Trade Alert for (OXY)
Occidental Petroleum – Buy January $40 @ 6.50 or less
Risk Rating: 2.5 (1 = lowest 5 = highest)
Below Break Even Probability: 45%
Max Loss Probability: 27%
An 80% plus profit on the Schlumberger play in the last weeks was TOO SOON as oil has blasted above $60. It is tough to complain about the quick couple week nearly double money grab…
Another Oil Setup Has Shown Up
Stocks have strengthened to within striking distance of the record highs BUT the energy complex has been held back. The Macro market correlation can boost beaten down and battered oil stocks that have bullish risk to reward.
As said here on the SLB trade losers and laggards offer great plays to see a snap back attack.
Occidental Petroleum stock is at ten year plus lows.
OXY has been slammed down 25%+ compared to the S&P up 20% in the last two years of trade.
A bottom with bullish divergence, new lows without new highs in volatility, has the stock basing with a bullish bounce the reward to risk play now.
A breakout of the $40 to $50 August on range targets $60 another 33% above.
Instead of buying long shares, a stock substitution strategy limits risk to the premium paid with unlimited upside profit potential. Less capital is required and the risk is less in dollar terms than buying shares outright.
The Options Way: Unlimited Upside Potential with Limited Risk.
An Occidental Petroleum long call option can provide the staying power in a potential larger trend extension. 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 OXY trading at $45.00, for example, an In The Money $40.00 strike option has $5.00 in real or intrinsic value. The remainder of any premium is the time premium 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 OXY January $40 Call at $6.50 or less.
This option strike gives you the right to buy the shares at a discounted $40 per share with absolutely limited risk. OXY was last that low in 2008.
The option Delta is 78% so this position will act much like long shares at a sharply lower investment cost.
This January option has four months for development.
The maximum loss if the option expires worthless is limited to the $6.50 or less paid per option contract.
The upside, on the other hand, is unlimited.
The OXY option trade break-even is $46.50 at expiration ($40.00 strike plus $6.50 or less option premium).
If shares rally to $60 range breakout target the option investment would gain 207%.