Trade Summary: October 6, 2014

October 6, 2014

 

 Trade Rationale

One of the more interesting developments in US equities this year is the selloff of the energy sector.  Energy Select Sector SPDR ETF (XLE), which is typically considered the most popular energy sector ETF, is down 8% over the last month and 11% over the last quarter.

But XLE doesn’t even tell the whole story.  Several industries within the energy sector have gotten absolutely hammered, such as offshore drillers and basically anything small cap.  Much of the damage is due to the rapidly falling price of crude, down 8% this year.

However, sectors tend to attract investment in a cyclical manner.  And, several energy sector names are becoming increasingly attractive.  What’s more, there’s only so far crude oil can fall before buyers step up.

As such, we’re going to go long three different energy stocks.  More specifically, we’re going to buy calls on an offshore driller, an oil equipment and services company, and a natural gas pipeline company.

First off, we’ll buy calls on Diamond Offshore Drilling (DO).  The large offshore driller has gotten punished this year, down 40% year to date.   At the current price, the shares look incredibly cheap.  For reference, the share price is just 3% above the 52-week low, but 45% off the 52-week high.

Next, we’re going to grab calls on Haliburton (HAL).  HAL, of course, is a massive oil &gas equipment and services company.  The stock’s had a decent year over all, but is down 7% this month.  Not only does the stock look cheap here, it’s also sitting at the 200-day moving average and due for a rebound.

Finally, let’s take a long position on Cheniere Energy (LNG).  LNG is part natural gas pipeline company, part natural gas marketer.  The company specializes in liquefied natural gas, which is the most sought-after form of natural gas.  LNG has had a huge year, but has pulled back lately, giving us a buying window.

Keep reading for the details of each trade.

 

Trade Details

#1) Buy Diamond Offshore Drilling (DO) December 35 Calls up to $1.50

We’re looking for an upside move in DO.  Our first profit point for conservative traders is at $40.  For aggressive traders, you can hold up to $45.  For risk control, the conservative exit level is $30.  $27.50 is the final exit level for aggressive traders.

#2) Buy Haliburton (HAL) December 65 Calls up to $2.15

Like DO, we want HAL to go higher.  Our first exit point for conservative traders is at $65.  For aggressive traders, you can hold to $70.  For risk control, the conservative exit level is $55.  And, $50 is the final exit level for aggressive traders.

#3) Buy Cheniere Energy (LNG) December 85 Calls up to $2.85

Finally, we’re looking for a rebound in LNG.  Our first profit-taking exit point for conservative traders is at $81.  For aggressive traders, you can hold up to $84.  For risk control, the conservative exit level is $70.  $65 is the final exit point for aggressive traders.

 

Category: AOA Trade Summary