Trade Summary: June 2, 2014

June 2, 2014

 

 Trade Rationale

The big news today, at least in terms of long-term impact, is Obama’s plan to reduce carbon emissions. His proposal will result in a 30% average emissions reduction for US power plants. Clearly, this is a very big deal to the energy industry.

Of course, there is plenty of opposition to this plan (as well as support). Yet, regardless of what happens with this particular proposal, it’s clear that change is coming to the energy industry. Emissions reductions have been a top-of-mind political topic for quite some time. And, by the end of Obama’s second-term, you can bet there will be changes made one way or another.

The hardest hit industry will of course be coal. Coal provides 39% of the US electricity supply but creates 75% of emissions. Obama’s proposal encourages states to switch to cleaner, equally abundant natural gas as an energy source in place of coal.

We’re going to buy puts on a coal company and calls on a natural gas company to trade on this particular theme. In addition, we’re going to take a bullish position on a solar company as the solar industry stands to gain from an overall nationwide emphasis on cleaner energy.

First off, we’re buying puts on Westmoreland Coal (WLB). Most of the coal industry has taken a beating in recent years as natural gas has gained prominence. WLB has actually done pretty well despite the industry concerns. However, I don’t believe it will continue to trade 55% above its 200-day moving average, especially with the new emissions reduction guidelines.

On the other hand, the natural gas industry is still very promising. Actually, when looking at drillers, it’s nearly impossible to separate oil and gas drillers from each other as most companies produce both. So, I’m looking for the best overall driller regardless of its proportion of oil and gas production. In this case, our best bet is a very undervalued Noble (NE). We’ll grab calls on NE.

We’re also buying calls on Solar City (SCTY). The residential/commercial solar energy systems company is going to continue to thrive off the push for cleaner energy. As the summer approaches, solar power becomes even more popular as it tends to reduce energy costs right away.

Keep reading for the details of each trade.

 

Trade Details

#1) Buy Westmoreland (WLB) July $30 Puts up to $1.70

We’re looking for WLB to move lower. Our first profit point for conservative traders is at $28. For aggressive traders, you can hold down to $26. For risk control, the conservative exit level is $32.50. $34 is the final exit level for aggressive traders.

#2) Buy Noble (NE) September $31 Calls up to $2.00

For NE, we’re looking for the share price to move higher. Our first exit point for conservative traders is at $34. For aggressive traders, you can hold to $37. For risk control, the conservative exit level is $28. And, $26 is the final downside exit level for aggressive traders.

#3) Buy Solar City (SCTY) July $55 Calls up to $3.00

In this case, we want SCTY to go higher. Our first profit-taking exit point for conservative traders is at $60. For aggressive traders, you can hold to $65. For risk control, the conservative exit level is $45. $40 is the final exit point for aggressive traders.

 

Category: AOA Trade Summary