Trade Summary: November 17, 2014

November 17, 2014

 

 Trade Rationale

As families across the US are busy stocking up on turkey, stuffing, and cranberries ahead of next week’s Thanksgiving holiday, the weather has officially turned cold. In most of the US, the extended summer temperatures have finally given away to the typical frigid norms.

Given how unseasonably warm the weather has been, it should surprise no one that analysts expect the winter to bring colder than normal conditions. After all, we have to pay for the extra warm weather, right? Well, whatever the reason, you can expect it to be nice and cold as the holidays hit.

So, if we’re going to be cold anyways, why not make some money off the conditions? This week’s theme is going to take advantage of the coming cold weather and extreme winter conditions.

First off, we’re going to buy calls on United States Natural Gas ETF (UNG). This may seem obvious, but natural gas tends to go up when temperatures are colder than expected. Most of the US relies on natural gas for heating (the Northeast still uses heating oil for the most part). As such, UNG is a straightforward trade on colder weather this winter.

We’re also going to go buy calls on Walgreen (WAG). The massive drug store chain should benefit from a harsh winter as well. The harder the winter, the more people are going to rely on drug stores for combating various ailments, among other things. WAG is also a bit more reasonably priced than some of its competitors.

Finally, we’re going to take the opposite position on Southwest Airlines (LUV). If conditions are going to be as bad as expected, or even close to as bad as last year, you can be sure the airlines will suffer. Families may decide to put off that vacation to grandma’s house until next year, or go skiing during spring break instead. LUV has been on a roll lately, but it looks due for a pullback.

Keep reading for the details of each trade.

 

Trade Details

#1) Buy United States Natural Gas ETF (UNG) January 24 Calls up to $1.75

This trade profits from an upside move in UNG. Our first profit point for conservative traders is at $26. For aggressive traders, you can hold up to $28. For risk control, the conservative exit level is $20. $18 is the final exit level for aggressive traders.

#2) Buy Walgreen (WAG) January 67.50 Calls up to $2.40

With the WAG trade, we’re also looking for a higher move. Our first exit point for conservative traders is at $70. For aggressive traders, you can hold to $75. For risk control, the conservative exit level is $62.50. And, $58 is the final exit level for aggressive traders.

#3) Buy Southwest Airlines (LUV) January 38 Puts up to $1.75

Finally, we’re looking for a downward move in LUV. Our first profit-taking exit point for conservative traders is at $35. For aggressive traders, you can hold down to $32. For risk control, the conservative exit level is $42. $44 is the final exit point for aggressive traders.

 

Category: AOA Trade Summary