The Spread Trader: Bull Call Spread On Conoco Phillips (COP)

| August 6, 2012 | 0 Comments

ConocoPhillips OptionsAs you know, we’re well into the dog days of summer.  It’s the time of year when people from all walks of life head for the beaches and take their last minute summer vacations.  

And Wall Streeters are no exception. 

Right now, many traders, institutional investors, and hedgies are away from their usual Wall Street posts.  With so many of the big players away, the volume of trades and pace of stock market activity slows down.

Here’s the thing…

Thinly traded markets typically follow the prevailing market trend.

That’s great news for the bulls.  As you can see, the large cap index has set a series of higher highs and higher lows since early June. 

  S&P 500 Large Cap Index Chart

In other words, an established uptrend has emerged.  That means stocks will likely follow this uptrend until trading volumes pick up again later this year.

But stocks aren’t the only thing in an uptrend…

Crude oil prices are also moving higher.  WTIC oil prices have rebounded from around $79 per barrel in June to over $90 today.

The combination of a bullish uptrend in stocks and rising oil prices bode well for the oil & gas exploration and production (E&P) stocks.  And ConocoPhillips (COP) is the unquestioned market leader in E&P.

Back in May, COP spun off its refining business.  COP instantly became the largest independent exploration and production company based on proved reserves and production. 

Separating the old ConocoPhillips into two companies is a stroke of genius in my opinion.  It should allow management to unlock shareholder value in both businesses.

This looks like a great opportunity to pocket some quick profits on a bull call spread on COP.  This bullish strategy is made by buying one call option and selling another call option at a higher price.

Here’s what to do now…

Buy the COP September 2012 $57.50 call for $0.91 and sell the COP September 2012 $60 call for $0.25.

Remember, when buying a call spread the maximum profit is the difference between the strike prices minus the amount paid for the spread.

This trade costs us $66 ($91 – $25) per contract.  Our breakeven on the trade is $58.16.  If COP is trading at exactly $58.16 on September 21st, we’ll get our $66 back.

 We’ve also limited our risk to our initial $66 investment.  If COP is trading below $57.50 at the September options expiration, we’ll lose $66.  But no matter how low COP falls, we can never lose more than our initial investment.

Now for the good part… profits!

Our maximum profit of $184 comes if COP is trading at or above $60 on September 21st.   

In other words, we’re risking $66 for a chance to make $184.  And according to our tracking system, there’s a 34% chance of this trade making money.  That’s a good risk/reward in my book.

Good Investing,

Corey Williams

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Category: The Spread Trader

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.