With this past month’s conveyor-belt bidup, it’s hard to find opportunities with reasonable risk and reward. If you buy a large chunk of equity due to the fear of being Left Behind, you can become the bagholder for someone much more prepared/lucky.
The past week Oil and Gas has been on a tear. We’ve had a nice rally in UNG, and although oil (USO) has remained stagnant, the services haven’t:
So with the thesis that we could see a run in oil names, I started looking for new breakouts– my subscribers were already long OIH via bull put spreads and they’re up 35%. But that’s for another post.
I came across EOG, and it had been bumping its head up on resistance and it looked ready for a final retest before it broke out. There’s plenty of open air in the chart– here’s the screenshot I took 2 days ago:
Here’s the trade alert I wrote out premarket:
Trade Rationale: Impending breakout, bullish moving average formation. Volatility is fairly priced, so I will be an option buyer expecting an increase in momentum. This is also a sympathy play with the move in nat gas and other stocks (CHK).
Trade Strategy: The green shaded area is key. If we rally we’ll probably find resistance there and we’ll pullback from that level. On the second retest I want to be long EOG Oct 80 Calls. They will cost from 225-250. You can take an anticipatory trade if you like, but it will most likely reduce your success rate. For the 40K I want to trade 5 contracts.
Risk Management: My worst case stop will be below 75, but I will start scaling out contracts on breakdowns of higher lows, such as that 76 level and the higher low I’m expecting on the pullback from 78.
Well EOG broke out and at 12PM on the 15th I sent an email alert out to my subscribers, as well as an alert on my Stocktwits desktop channel. Here’s the email I sent out:
I mentioned the EOG trade in the premarket Trade setups, and it did exactly what I had suspected– hit resistance, slight pullback, and now it’s really breaking out. Buy 5 EOG Oct 80 Calls for 2.60 – 2.70. Initial stop 77.75
After only 2 days we were on the right side of both price and volatility– the stock continued to expand, and we exited out of the trade today at 12:30.
My entry was 2.70 and my exit was 5.00, so a total gain of $230 per contract, an 85% gain. Since I suggested 5 contracts for our model portfolio, we locked in a realized absolute gain of $1150– not bad for a 2 day hold.
We’ve got another breakout trade in oil that we’re playing, and it looks to be a runner! It’ll probably pullback here soon, but there’s plenty of these opportunities out there.
If you’re interested in plays like these, as well as other more complex option plays, check out my Premium Service. This trade would have payed for your subscription for 2 years!