Buy Alert: April 10, 2014

| April 10, 2014

Buy Alert: April 10, 2014

 

Option Strategy:

Buy Spectra Energy (SE) September 19, 2014 $39.00 calls for $1.35 or better.

 

Commodity Outlook: Natural Gas

After a volatile winter, the price of natural gas has settled into the $4.50 mmBtu range.  But as you may know, US inventories of the commodity are severely depleted thanks to this winter’s colder than normal temperatures.

Due to the abnormally large storage drawdown, natural gas producers have a monumental task of refilling US storage caverns to 3.6 Tcf by Fall.  Current inventories are in the 822 Bcf range.

What’s the takeaway?

Companies in the natural gas processing and transportation sector stand to make a pretty penny over the next six months.  You see, natural gas has to get from where it is extracted to where it will be stored.  And along the way, it needs to be processed into acceptable pipeline quality.

No doubt about it, strategically located natural gas pipelines are in high demand.

Here’s a great way to capitalize on this trend…

 

Resource Company: Spectra Energy (SE)

SE is a Houston, TX based natural gas pipeline company. They offer three essential services to the US oil and gas industry: gathering and processing, transmission and storage, and distribution.

Thanks to the incredibly large quantity of natural gas that needs to be processed and put into storage by this Fall, SE’s services will be in extraordinarily high demand.

SE shares have been on a steady uptrend for the past year, rising from $30 in June 2013 to just over $38 in recent trading.  Given the natural gas pipeline industry’s underlying bullishness, SE shares will likely continue trending upwards for the foreseeable future. 

As a matter of fact, Citigroup analysts have a $47 price target on SE.

Folks, now’s the perfect time to get on the bullish side of SE. 

Here’s how we’ll do it…

Let’s buy the SE September 19, 2014 $39.00 calls for $1.35 or better. 

The current bid/ask spread for this contract is $1.00/$1.20. 

Pay no more than $1.35 per contract!

Our official entry price for performance tracking is $1.20.  Your price may be higher or lower.

 

Exit Strategy:

Spectra Energy

Remember, we want SE to trade higher.  Since shares are trading at all time highs, I’m unable to put our profit targets on the chart like I usually do.  Instead, I am listing them here:

Our first profit target is $42.00, while our second profit target is $44.00.

Given the bullish industry fundamentals, along with the backing of Wall Street analysts, SE has very good odds of reaching these levels.

However, being the disciplined traders that we are, we always have a risk-control exit just in case something goes wrong. And in this case, the risk control price is $35.80.

If SE falls below that level, conservative investors should consider closing this trade to conserve capital.

 

Category: Commodity Trading

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