Trade Summary: May 9, 2016

| May 9, 2016

May 9, 2016

 

 Trade Rationale

The general direction of the stock market has been more sideways than up this year, but I guess we can still call this a bull market.  I mean, we’re not in a bear market, right?  Anyhow, stocks aren’t just going up in unison. It’s definitely taking a more hands on approach to find good stocks lately.

One thing that’s different about stock picking right now is sectors seem to be going through a rolling bull market.  That is, a certain sector catches a bid and does pretty well for a while.  Then, buyers move on and head to another sector.  We’ve seen this recently when we successfully focused on financial stocks ahead of earnings.

The next sector I believe we’re going to see a surge of buying in is basic materials.  As such, we’re going to buy calls in two basic materials companies.  Conversely, we’ll purchase puts in one basic materials company that appears to be overvalued.

The first company we’ll grab calls in is CF Industries (CF).  CF is an agricultural chemical company specializing in products like fertilizer.  The stock has followed the agriculture business lower over the last year, but looks like it may have bottomed out recently.  The share price is currently cheap on an earnings basis.

Next, we’ll buy calls in Western Refining (WNR).  WNR, a mid-sized oil refinery, is having a bad month.  After missing earnings, the stock has plummeted.  However, the stock price is at rock bottom from an earnings perspective and all the bad news is out.  This is a classic case of overselling.

Finally, we’re going to buy puts on Diamond Offshore Drilling (DO).  Oil is well off its lows, but it’s still very hard to justify the stock prices for most offshore drilling operators.  Crude has a long way to go before these rigs start producing profitable oil again.  DO looks like it could be seeing some selling in the near future.

 

Trade Details

#1) Buy CF Industries (CF) June 17th 30 Calls up to $2.20

For this trade, we’re looking for a move higher in CF.  Our first profit point for conservative traders is at $32.  For aggressive traders, you can hold up to $34.  For risk control, the conservative exit level is $27.  $25 is the final exit level for aggressive traders.

CF Industries

#2) Buy Western Refining (WNR) June 17th 21 Calls up to $1.65

With this trade, we’re also looking for the stock to climb.  Our first exit point for conservative traders is at $22.50.  For aggressive traders, you can hold to $25.  For risk control, the conservative exit level is $19.  And, $17 is the final exit level for aggressive traders.

Western Refining

#3) Buy Diamond Offshore Drilling (DO) June 17th 22.50 Puts up to $1.65

Finally, we’re looking for a move down in DO.  Our first profit-taking exit point for conservative traders is at $21.  For aggressive traders, you can hold to $19.  For risk control, the conservative exit level is $26.  $28 is the final exit point for aggressive traders.

do050916

 

Category: AOA Trade Summary

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