Buy Alert: September 25, 2014

Buy Alert: September 25, 2014

 

Option Strategy:

Buy Occidental Petroleum (OXY) January 16, 2015 $110.00 calls for $0.75 or better.

 

Commodity Outlook: Crude Oil

It’s a big down day on Wall Street. The DOW is off nearly 250 points as I write. However, WTI crude is holding up relatively nicely. The commodity is down a mere $0.27 on the day.

While it’s likely the price of crude stays subdued for a while longer due to the surging US Dollar, I have an interesting trade in an oil company that I want to share with you today.

Here it is…

 

Resource Company: Occidental Petroleum (OXY)

This large-cap international oil and gas producer has a very interesting catalyst in the pipeline.

First of all, OXY shares spiked in yesterday’s session when investors found the company was added to Merrill Lynch’s US1 list. In case you’re unaware, the US1 list holds only a handful of companies Merrill Lynch analysts hold in very high regard.

Basically, the list is reserved for companies with exceptional upside potential. Speaking of which, Merrill Lynch has a $130 price target on OXY shares.

What’s so special about this company?

OXY is in talks to sell some of its Middle East assets. According to a recent report in Petroleum Intelligence Weekly (PIW), OXY is close to selling a $3 billion stake in a United Arab Emirates gas field.

This potential sale is probably why there’s an abnormally large amount of open interest in out-of-the-money January 2015 calls.

You see, if the sale goes through OXY will have the capital it needs to raise its dividend and buy back shares- two things that investors love.

And the best part is…

According to PIW’s sources, the sale will likely go through by year-end.

So here’s what we’ll do…

Buy the OXY January 16, 2015 $110.00 calls for $0.75 or better.

The current bid/ask spread for this contract is $0.60/$0.67.

Do not pay more than $0.75 per contract!

Our official entry price for performance tracking is $0.67. Your price may be higher or lower.

Exit Strategy:

Remember, we want OXY to trade higher. Our first profit target is $105, which is the 52-week high set in June. Believe it or not, we could see this target even if the sale doesn’t go through. The oil and gas industry is deeply oversold and investors will likely send OXY higher on an industry rebound.

However, if the sale does go through, OXY could jump to the $115-$120 range. So let’s set our second target at $115.

The risk control price for this trade is $95. If OXY trades below that level, conservative investors should consider closing this trade to preserve capital.

Keep in mind, we’re using far out-of-the-money call contracts for this trade. That’s because the catalyst that may send OXY higher is a very speculative.

 

Category: Commodity Trading