Trade Summary: December 15, 2014

December 15, 2014

 

 Trade Rationale

Lately our themes have focused on oil and the related impact of the plunging price of crude. The thing is, as long as the price of oil keeps crashing, more and more opportunities arise. I jumped the gun with a long oil theme several weeks back, but I believe it’s time to go long certain oil stocks once again.

This time around, I’ve learned from what went right and wrong with our last long-oil. We’re going to stay away from companies that get hurt the most from cheap oil (drillers for instance). Instead, we’ll focus on integrated oil giants and refiners. They are most likely going to be the companies recovering the quickest.

In the meantime, oil will find a bottom sometime soon. The selloff in crude oil has gone from fundamental selling to fear-based crashing. At $55 per barrel, even the most hardened oil bears have to think a bottom is coming soon. I personally believe we’ll settle into a range between $50 and $65, with a median of around $60. Let’s see how the next few weeks play out.

In the meantime, here are our trades.

First, we’re going to go long the biggest oil company of them all, Exxon Mobil (XOM). XOM’s dividend is completely safe, as well as is the company’s share buyback program. The stock is now extremely attractive from a valuation standpoint and appears to have hit technical support.

Next, we’re also taking a bullish position on Valero (VLO). Like XOM, VLO’s dividend is safe. And, the stock valuation is absurdly low at these levels. Keep in mind, VLO is a refiner. The company is going to continue refining oil regardless of the price of crude.

Finally, we’ll take a bearish position on an exploration and production company. In this case, I’m recommending buying puts on Noble Energy (NBL). While NBL has gotten hit just like other oil producers, it has already broken through key support levels. Moreover, the stock still has a relatively high valuation compared to other producers.

Keep reading for the details of each trade.

 

Trade Details

#1) Buy Exxon Mobil (XOM) February 90 Calls up to $2.65

This trade profits from a rebound in XOM. Our first profit point for conservative traders is at $92. For aggressive traders, you can hold up to $96. For risk control, the conservative exit level is $85. $83 is the final exit level for aggressive traders.

#2) Buy Valero Energy (VLO) January 47.50 Calls up to $1.95

With the VLO trade, we’re also looking for a higher move. Our first exit point for conservative traders is at $49. For aggressive traders, you can hold to $52. For risk control, the conservative exit level is $42. And, $40 is the final exit level for aggressive traders.

#3) Buy Noble Energy (NBL) January 42.50 Puts up to $2.85

Finally, we’re looking for a down move in NBL. Our first profit-taking exit point for conservative traders is at $40. For aggressive traders, you can hold down to $37.50. For risk control, the conservative exit level is $47.50. $52.50 is the final exit point for aggressive traders.

 

Category: AOA Trade Summary