Trade Summary: December 1, 2014

December 1, 2014

 

 Trade Rationale

I’ve written in the recent past about the plunging price of crude oil. We’ve had one major theme based on oil’s decline, and another theme where the falling price of oil was involved in the reasoning. Nevertheless, oil is once again front and center in this week’s trading theme.

The thing is, the price of crude oil has continued to plummet. It’s now at the point where even the most bearish of oil analysts is surprised by just how far black gold has fallen. For a brief period, a barrel of crude dropped below $65. Frankly, I never thought we’d see those prices again.

As long as the supply glut continues, oil will remain cheap. That may last a couple months or a couple years. Regardless, we can expect relatively inexpensive oil for at least a little while. As such, we’re going to make three trades designed to take advantage of cheap crude oil.

First off, we’re going to buy puts on Union Pacific (UNP). UNP, of course, is a huge railroad. As oil gets expensive, shippers tend to make heavier use of rail as a mode of transportation. With oil as cheap as it’s been in years, railroad companies should see a substantial hit in revenues.

On the other hand, we’re going to buy calls on Teekay (TK). Dry bulk shipping has also dropped with the price of oil. However, dry shipping is necessary for raw materials despite the price of oil. There’s really no substitute. When oil prices settle in, savvy investors will jump back into the bargain dry shipping industry and grab stocks like TK.

Finally, we’re going to buy calls on Amazon.com (AMZN). What does AMZN have to do with cheap oil? Well, lower gas prices mean more money in shoppers’ pockets this holiday season. However, consumers are avoiding physical stores more and more every year and instead shop online. No retailer does more online business than AMZN.

Keep reading for the details of each trade.

 

Trade Details

#1) Buy Union Pacific (UNP) February 110 Puts up to $3.00

This trade profits from a downward move in UNP. Our first profit point for conservative traders is at $105. For aggressive traders, you can hold down to $100. For risk control, the conservative exit level is $120. $125 is the final exit level for aggressive traders.

#2) Buy Teekay (TK) January 50 Calls up to $1.75

With the TK trade, we’re looking for a higher move. Our first exit point for conservative traders is at $52.50. For aggressive traders, you can hold to $57.50. For risk control, the conservative exit level is $42.50. And, $40 is the final exit level for aggressive traders.

#3) Buy Amazon.com (AMZN) January 360 Calls up to $3.00

Finally, we’re looking for an upward move in AMZN. Our first profit-taking exit point for conservative traders is at $345. Yes, I’m aware the conservative exit point is well below the strike price. However, with a volatile stock like AMZN, we’ll either be highly profitable when the stock hits that level, or we will have been stopped out already. For aggressive traders, you can hold up to $365. For risk control, the conservative exit level is $310. $300 is the final exit point for aggressive traders.

 

Category: AOA Trade Summary