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Trade of the Day: Southwestern Energy (SWN)

Though I think the lows are in for the time being, I expect the market to consolidate this run

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Southwestern Energy (SWN) is an institutional favorite in the oil and gas business. Based out of Houston, the company is gearing more of its production to natural gas, where the future is brightest for domestic energy.

Management gave solid guidance on Jan. 28 and has good sponsorship from the analyst community. My view is the shares, after having broken out above $40, can trade to $46 as the weather in the U.S. stays freezing cold while the middle-east strife is getting hot after the United States and France agreed to enforce sanctions on Iran.

Recommendation: For every 100 shares of SWN you own or purchase at market, use a limit order to sell to open one SWN March $46 call at 50 cents or more per contract.

SWN is currently trading just under $43, so we’ll assume you buy shares at the $43 level. Then you sell to open one SWN March $46 call for 50 cents ($50 per contract).

If SWN closes above the $46 strike price at options expiration on March 22, as I expect it to, the shares you bought at $43 will be “called away” for $46, plus you get to keep the $50 premium you got from selling the calls.

On March 22, your potential called-away return is 8.1%. Pretty good for just a few weeks in the midst of a volatile market.

Short-term covered calls are a great way to play these kinds of Teflon market moments in which all material news is viewed as either bullish or shrugged off as weather-related. This trend can carry the market higher, which will force widespread short-covering from these levels. That’s how it works when half of the trading world doesn’t believe the rally is valid or will stick.

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