Trade Summary: February 1, 2016

| February 1, 2016

February 1, 2016

 

Trade Rationale

The equity markets have stabilized to some extent, but the energy markets are still in flux.  Crude oil is down 17% for the year despite already sitting at multi-year lows.  Natural gas is also down 9% year-to-date, further muddying the picture for fossil fuels.

You may think cheap oil and gas is bad news for renewable energy.  Why spend money on renewables when fossil fuel is so cheap?  Yet, renewable energy has continued to thrive for a couple reasons.  First off, with oil and gas so cheap, there’s little reason to invest in new technologies related to the field.  Instead, that money is going towards renewable energy, which has much higher upside.

More importantly, efforts at reducing carbon emissions are really starting to take hold in more advanced countries.  As renewables get cheaper, it’s becoming hard for governments to deny using clean energy over much dirtier alternatives.

We’re going to attempt to capitalize off this theme by buying calls in two renewables-related companies while purchasing puts in an oil company.

The first company we’ll buy calls in is Xcel Energy (XEL).  Xcel is a $19 billion electric utility, which may not seem that exciting.  However, the company has embraced using renewable energy and is generating more and more power from areas like wind energy.  The stock has also been performing well this year despite the overall market.

Another opportunity in renewable energy lies with First Solar (FSLR).  The US-based solar giant has been a bit volatile, but has also held up well during the selloff in January.  The company, which focuses on large scale solar farms, is trading at a very reasonable price currently.

Finally, we’re going to buy puts on Exxon Mobil (XOM).  Exxon continues to be one of the largest public companies in the world, even with the plummeting price of oil.  Because of its size and breadth, the stock price hasn’t gotten hit as hard as you may have guessed.  I think the current price is still a bit rich and there’s room for a bigger dip.

 

Trade Details

#1) Buy Xcel Energy (XEL) June 17th 40 Calls up to $1.25

For this trade, we’re looking XEL to continue its recent climb.  Our first profit point for conservative traders is at $42.  For aggressive traders, you can hold up to $44.  For risk control, the conservative exit level is $35.  $33 is the final exit level for aggressive traders.

Xcel Energy

#2) First Solar (FSLR) March 18th 75 Calls up to $2.80

With this trade, we’re also looking for a move higher.  Our first exit point for conservative traders is at $75.  For aggressive traders, you can hold to $78.  For risk control, the conservative exit level is $60.  And, $55 is the final exit level for aggressive traders.

First Solar

#3) Buy Exxon Mobil (XOM) March 18th 72.50 Puts up to $2.35

Finally, we’re looking for a down move in XOM.  Our first profit-taking exit point for conservative traders is at $72.50.  For aggressive traders, you can hold to $70.  For risk control, the conservative exit level is $80.  $82.50 is the final exit point for aggressive traders.

Exxon Mobil

 

Category: AOA Trade Summary

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