by Joseph Hargett | March 21, 2012 10:55 am
When Saudi Oil Minister Ali al-Naimi promises to increase oil output and prices fail to budge, you know there are serious issues in the energy sector. In fact, Ali al-Naimi told Reuters this week, “I want to assure you that there is no shortage of supply in the market.” Unfortunately for motorists around the globe, reassurances that an Iranian blockade of the Strait of Hormuz would not affect supply have had little effect on either oil or gasoline prices.
In fact, AAA reports that the national average for gasoline prices has soared to $3.85 per gallon – a level not seen since 2008. What’s more, the organization expects prices to peak at about $4.25 per gallon. With the potential for Middle East tensions to escalate, a growing love affair with automobiles in China and India, and the U.S. driving season yet to shift into high gear, these projections may be conservative, at best.
There are ways for traders to take advantage of this situation, however, and given the inherent volatility of the energy sector amid periods of Middle Eastern tension, there are few better investment vehicles than options. So, with no further delay, I give you three potential options strategies for taking advantage of high fuel prices:
While probably the least volatile name within the energy sector, Exxon offers a nice entry point for anyone looking to benefit from rising gasoline prices. What’s more, Exxon is also the biggest player in the natural gas market, meaning the stock can also be utilized as a hedge against alternative fuels within the energy sector.
Technically, XOM has seen stellar growth for the past several months, with the shares rallying some 27% since hitting a low near $63.50 in August 2011. XOM is currently consolidating its gains into rising support at its 50-day moving average, as the stock prepares to challenge resistance near $88. This region has provided a ceiling for XOM since late January 2012, but a breakout on rising oil and gas prices could be quite lucrative for bullish options traders.
To take advantage of such a breakout, traders might want to consider an April or May 85 call. This option is currently in the money, providing a bit of cushion to absorb any short-term weakness. Additionally, you can offset your risk further by simultaneously selling a 90 call in the same option series. For example, the May 85 call was last asked at $2.74, while the May 85/90 bull call spread was asked at $2.20, placing breakeven for these strategies at $87.74 and $87.20, respectively.
Rising gas and oil prices always spur a renewed interest in alternative fuels, and natural gas has become quite a popular choice over the past several years. While Exxon is the biggest player in this field, CHK (as one of the largest independent natural gas producers in the U.S.) is more of a “pure play” on the commodity. Furthermore, with a market capitalization of roughly $16.71 billion, Chesapeake Energy is a bit more on the stable side than newcomers to the natural gas sector.
CHK shares have shown solid gains during past several months, rising more than 21% since bottoming in late January. The stock blew past its 50-day moving average in mid-February, tested support near this trendline in mid-March, and is now set to topple former resistance near $26. With soaring oil and gasoline prices forcing many to reconsider natural gas as a viable replacement, CHK could be on the cusp of a very profitable breakout for bullish traders.
As with all options trading, a degree of caution and risk management is always recommended. As such, options traders may want to consider a May 25 call, or, better yet, a May 25/27 bull call spread. The former was last asked at $1.49, while the latter was recently asked at 86 cents, placing breakeven at $26.49 and $25.86, respectively.
Finally, you can eschew “fossil fuels” altogether by looking for opportunities in alternative energy. Electric transportation doesn’t charge itself and solar continues to make major inroads into global power grids. While many solar stocks are struggling in the current economic environment, mainly due to government austerity measures, Canadian Solar remains a standout among its peers.
From a technical standpoint, CSIQ has been impressive, soaring more than 50% since hitting a near-term low of $2.20 in mid-December 2011. The ride has been a bumpy one, though, with CSIQ peaking above $4 in mid-February, only to plunge back below $3 before the beginning of March. The shares have since rebounded, and are looking to reclaim former support at their 50-day moving average.
A move above this key trendline could be just what options traders are looking for, as it could signal a return to the stock’s recent highs above $4. To take advantage of this potential upside, traders might want to consider the April 3 call, which was last asked at 60 cents.
Since option premium could be an issue with CSIQ trading in the low single digits, a viable alternative to this call option might be to enter a married put. For instance, you would purchase 100 CSIQ shares while simultaneously buying one April or May 3-strike put. This strategy allows you to participate in any upside while also limiting your losses on any potential drop below $3 for CSIQ.
As of this writing, Joseph Hargett does not own any shares mentioned here.
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