The greenback is fading fast this morning on the heels of an atrocious May jobs report. And while the bulk of the equity market is taking it on the chin, commodities are just loving the dollar’s misfortune. Gold and silver are flying for a change and energy stocks are holding their own. Devon Energy Corp (DVN) boasts one of the best looking setups in the space.
Indeed, DVN stock sits a whisker below a resistance zone, which has the potential to shower shareholders with profits.
The ongoing recovery in energy stocks has ushered DVN back into an uptrend. As far as the bulls are concerned, order has been restored. While the magnitude and duration of the budding uptrend has been insufficient in turning the 200-day moving average higher, it’s a heck of a start.
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Indeed all other key moving averages are moving higher, supporting the bulls’ foothold. The price action in recent weeks has taken on the form of a cup and handle.
The pattern is named such because, well, it looks like a cup and handle. $37.50 is the resistance level buyers need to breach to complete the pattern and unlock all of the bullish implications embedded in the setup.
While Devon Energy may not possess the mustard to trigger today, watch closely in the coming days.
Devon Energy Call Spreads
As is typical, demand for options has ebbed alongside the recovery in DVN. The descent in implied volatility has ushered option premiums to levels more palatable for purchase.
Rather than swinging for the fence with a straight call purchase, let’s elevate our odds of success with a vertical call spread.
Buy the Oct $36/$40 bull call spread for around $1.85. The position is initiated through buying to open the Oct $36 call and selling to open the Oct $40 call. The initial cost of $1.85 represents the max risk and will be lost if Devon Energy sits below $36 at expiration.
The max reward is limited to the distance between strikes minus the net debit, or $2.15, and will be captured if DVN can rise above $40 by expiration.
By using October options, we give the stock ample time to make the necessary journey north of $40.
Finally, consider waiting for a break of $37.50 before pulling the trigger. Otherwise the pattern remains incomplete.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
