Buy Alert: August 7, 2015
Buy Alert: August 7, 2015
Option Strategy:
Buy Oasis Petroleum $OAS September 18, 2015 $11.00 calls for $0.80 or better.
Commodity Outlook: Energy
Despite investors’ collective enthusiasm, this morning’s highly important Non-Farm Payrolls report was rather uneventful. The US added 215,000 jobs last month, which was basically in-line with analysts’ estimates.
So far the equity markets are reacting to the report with a big yawn…
However, WTI crude is continuing its slide towards the March 2015 lows at $42.50 a barrel.
It’s hard to believe, but the commodity has only had 4 positive trading days in the past 17. The past few weeks’ downturn has WTI off by 19.2% on a year-to-date basis.
Without question, bears made a big impact on crude in July.
But here’s the deal…
Despite all the crude bearishness, I’m still seeing signs of a bottom in oil exploration stocks. As you know, the industry has been annihilated the past two months as investors jettisoned energy stocks from their portfolios.
But over the past week, I’ve noticed the downward momentum is starting to wane. We even have an important technical indicator confirming my observation.
Take a look…
As you can see, the Relative Strength Index (RSI) did not make a new low (opposing red lines) along with the SPDR Oil & Gas Exploration & Production $XOP.
When a momentum indicator like RSI fails to confirm a new price low set by a market, it’s called a divergence- and it’s a great sign a bullish reversal is near.
Remember, we profited nicely from the June/July downturn in $XOP. Depending on your exit strategy, you should have collected sizeable gains well in excess of 100% on your September $48 puts.
Of course, we also endured some small losses in $RIG and $SWN the past few days.
But with the $XOP showing continued signs of a bullish reversal, it’s appropriate to make additional low-risk call option bets on select oil and gas names.
Here’s one that should give us outsized gains when bulls return to the energy space…
Resource Trade: Oasis Petroleum $OAS
Here’s an oil explorer we traded in March 2015 for gains in excess of 100%. The Bakken producer ran to $18 a share in April before sliding to new yearly lows in July.
However, $OAS is showing a similar pattern to $XOP. There’s a divergence between price and the RSI momentum indicator.
So here’s what we’ll do…
Buy the $OAS September 18, 2015 $11.00 calls for $0.80 or better.
The current bid/ask spread for this contract is $0.55/$0.70.
Do not pay more than $0.80!
Our official entry price for performance tracking is $0.70. Your price may be higher or lower.
Exit Strategy:
As you can see, $OAS made a new low in early August while the RSI did not. This is a great sign a bullish reversal is near.
Remember, we want $OAS to trade higher. Our first profit target is $12.00 while our second target is at $15.00.
Our risk control line is $7.90. If $OAS trades below that level, conservative investors should consider closing this trade to preserve capital.
Category: Commodity Trading
