Buy Alert: December 12, 2014

| December 12, 2014

Buy Alert: December 12, 2014


Option Strategy:

Buy Oasis Petroleum (OAS) January 16, 2015 $13.00 calls for $1.30 or better.


Commodity Outlook: Oil

Believe it or not, crude is falling to new 5-year lows today. The commodity is careening below $58 as I write. Without question, bears still have complete control of this market.

But take a look at this…

As you can see from this 20-year chart, the commodity is nearing a very important support trend line. The red line above connects the 1999 low, the lows of late 2001, and the financial crisis low (blue circles).

If oil bulls are going to put up a fight, this line is where they’ll do it!

This very important support line is probably why a big investor made a huge bullish options bet in the SPDR S&P Oil and Gas ETF (XOP) yesterday.

In case you’re unaware, someone created a call spread in XOP. They bought the March $53 calls and sold the March $62 calls. The net cost of the trade was $1.50 per contract. Since the investor bought 14,500 contracts, the total premium paid to own this position is a whopping $2.17 million!

XOP will have to get back above $54.50 by March in order for the massive trade to pay off. XOP is currently trading for $44.52.

Clearly, someone thinks oil and gas names are going to bounce- big time.

Let’s follow this big money trade with one of our own…


Resource Company: Oasis Petroleum (OAS)

Despite the weakness in oil today, OAS shares are up 8% as I write. As you may know, OAS is a Bakken oil explorer holding 500,000 acres of net leaseholds in the Williston Basin.

Thanks to the severe 6-month downdraft in oil, OAS has gone from a $50/share mid-cap producer to a $12/share small-cap. No doubt about it, the downturn has simply been incredible.

But here’s the deal…

When an oil producer starts showing strength relative to the commodity it produces, it’s time to sit up in your chair and take notice. While it’s impossible to say this is the absolute bottom for OAS, the risk/reward is definitely in our favor at this point.

Let’s keep it simple…

If OAS breaks to a new low under $10.50, we’ll close the trade. But if oil can catch a bid off the technical support level I pointed out above, we could be sitting on a huge winner by mid-January.

So here’s what we’ll do…

Buy the OAS January 16, 2015 $13.00 calls for $1.30 or better.

The current bid/ask spread for this contract is $0.95/$1.20.

Do not pay more than $1.30 per contract!

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

Exit Strategy:

Oasis Petroleum

Remember, we want OAS to trade higher. Our first profit target is $17.00, while our second target is at $22.50.

The risk control price for this trade is $10.50. If OAS trades below that level, conservative investors should consider closing this trade to preserve capital.


Category: Commodity Trading