Buy Alert: October 20, 2014
Buy Alert: October 20, 2014
Option Strategies:
Buy US Oil Fund (USO) December 19, 2014 $32.00 calls for $1.05 or better
Buy US Natural Gas Fund (UNG) January 16, 2015 $21.00 calls for $1.25 or better
Commodity Outlook: Energy
The energy markets are in a state of disarray right now…
An intense surge in investor fear sent not only the price of crude, but the entire stock market into freefall last week. At one point, West Texas Intermediate (WTI) plummeted to $80 a barrel while the Dow sank 440 points!
It was abundantly clear investors were acting out of fear.
But in case you’re unaware, panic has a tendency of creating great trading opportunities…
That’s why we’re looking at two low risk/high-reward commodity ETF trades in today’s issue. As you’ll see, one is in the oil market while the other is in natural gas.
Given the recent wipeout in energy, now’s a great time to act!
Resource ETF #1: US Oil Fund (USO)
As I mentioned a minute ago, WTI crude plummeted last week thanks to overall market panic. But more importantly, word that OPEC (the Middle Eastern oil cartel) was “comfortable” with crude at multi-year lows had investors questioning the oil market even more.
Folks, I don’t buy it for a second…
With both WTI and Brent crude in the $80 a barrel range, budgets of countries like Iran, Venezuela, and Libya are bleeding badly. Even though they’ve stated otherwise, it’s highly likely OPEC cuts production at a November 27th meeting.
If OPEC cuts its 2015 production outlook, we’ll see an immediate bullish reaction in WTI. In fact, I wouldn’t be surprised to see the price of WTI rise into this highly anticipated event.
That’s why we’re buying calls in the US Oil Fund (USO). As you may know, USO is a commodity ETF that trades in sync with the price of WTI.
So here’s what we’ll do…
Buy the USO December 19, 2014 $32.00 calls for $1.05 or better.
The current bid/ask spread for this contract is $0.73/$0.95.
Do not pay more than $1.05 per contract!
Our official entry price for performance tracking is $0.95. Your price may be higher or lower.
Exit Strategy:
Remember, we want USO to trade higher. Our first profit target in USO is $33.50, which equates to approximately $90 a barrel on WTI. If investors receive good economic news in coming weeks, which eliminates much of the fear we’ve seen in recent days, USO could jump to our second profit target at $35.00.
The risk control price for this trade is $29.75. If USO trades below that level, conservative investors should consider closing this trade to preserve capital.
Resource ETF #2: US Natural Gas Fund (UNG)
Here we are just a few weeks away from the start of the winter heating season and the price of natural gas is trading at $3.67 mmBtu.
As you may remember, this commodity surged over $6 last winter as US supplies fell to the lowest level in over a decade.
Believe it or not, US natural gas inventories still haven’t recovered from last winter’s brutal cold. In fact, storage levels are still 10% below the 5-year average.
Here’s the deal…
Even though winter doesn’t officially start until late December, the heating season officially begins on November 1st. With natural gas trading at the bottom of multi-month trading range now’s the perfect time to bet on a reversal to higher prices.
Now let’s be clear…
The outcome of this trade will have a lot to do with the weather over the next two months. If Eastern and Central US temperatures are warmer than normal, natural gas could slowly bleed down to $3.50.
But if temperatures are average or below normal, natural gas will likely make its way back above $4 mmBtu in short order. And in a best-case scenario, the Eastern and Central US will once again succumb to bitter cold by early January.
Such a situation will likely push natural gas back into the $5-$6 range.
So here’s what we’ll do…
Buy the US Natural Gas Fund (UNG) January 16, 2015 $21.00 calls for $1.25 or better. In case you’re unaware, UNG is a commodity ETF that trades in sync with the natural gas market.
The current bid/ask spread for this contract is $1.10/$1.16.
Do not pay more than $1.25 per contract!
Our official entry price for performance tracking is $1.16. Your price may be higher or lower.
Exit Strategy:
Remember, we want UNG to trade higher. Our first profit target in UNG is $23.50, which is roughly $4.25 mmBtu in natural gas. If the commodity jumps to $4.50 by expiration in January, we should see our second profit target at $25.
The risk control price for this trade is $19.25. If UNG trades below that level, conservative investors should consider closing this trade to preserve capital.
Category: Commodity Trading
