While last week’s 7% launch in the S&P 500 Index brought much-needed relief to market bulls, the short-term shift from oversold to overbought is making it somewhat difficult to identify low-risk/high-potential-reward opportunities.
A few days of consolidation or pullback would be a welcome development in helping provide higher-quality setups for those looking to join the bullish run.
One stock which has spent the last few trading sessions digesting its recent gains is Cabot Oil & Gas (NYSE:COG). If this energy name is able to take out resistance at the $89.50 zone, higher prices may be in the offing.
Option traders have a variety of ways to exploit the expected rise in COG. You could buy the COG Jan 90 Calls just under $4. But given the current trading environment, you may instead want to consider a simple bull-call spread trade.
The bull-call spread consists of buying to open a lower-strike call while selling to open a higher-strike call in the same expiration month. It is a debit spread, which means you pay to enter it. But the cost is lower than if you just bought the lower-strike call by itself.
Traders looking for bullish exposure to the energy space can consider purchasing the COG January 90-95 call spread. If you enter around $2 (i.e., you can buy the $90 call for around $4 and simultaneously sell the $95 call for a little over $2 right now – the latter is money you collect), the max risk is limited to $200 and the max reward maxes out at $300.
The potential risk limited to the initial cost of the trade. The potential reward is limited to the distance between strikes minus the cost of the trade.
The bid/ask spread is a tad wider than I’d like to see, so limit orders are a must here. And be sure to wait for a break above the $89.50 area before pulling the trigger.
At the time of this writing Tyler Craig had no positions in COG.