Don’t be swayed by the latest bearish headlines, if price is any indicator the VanEck Vectors Oil Services ETF (NYSEARCA:OIH) is moving up. And for oil stock bulls wanting to ride this trend, an OIH bull call spread makes for a less speculative and more calculated investment.
The week started off well enough in the headline department for the price of oil. Handshakes, winks and pledges of lower production comments by Russia’s Putin and the Saudi energy minister found the November Nymex contract gushing higher by more than 2.65% to a year-to-date high.
Since then, it’s been all downhill for oil stocks and OIH ETF constituents, such as Schlumberger Limited. (NYSE:SLB), Halliburton Company (NYSE:HAL) and National-Oilwell Varco, Inc. (NYSE:NOV).
Or has it?
On the one hand, Thursday’s swelling inventory data and Tuesday’s bearish OPEC production report for September with output at its highest level since 2008, would suggest oil stock bulls are in trouble.
Weak data out of China could also spell doom and gloom for black gold and oil stock supporters.
The specter of slowing growth for the emerging and massive economy are once again front page news and proved sufficient to knock the iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) down to a one month low.
Despite alarmist theatrics and even crude falling modestly below $50 a barrel, bearish headlines have done nothing except provide bulls in the OIH ETF a stronger opportunity for riding a trend in oil stocks still set to go higher.
OIH ETF Daily Chart
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After breaking through a punishing downtrend of nearly two years in duration back in the spring, the oil services sector has put together a fairly constructive uptrend.
At times, the price action in these oil stocks has been volatile. And truthfully, hints of a top back in June and / or secondary downtrend forming, may have been worthy of bulls second guessing the developing bullish trend in OIH.
Nevertheless, there was a key failure by OIH ETF bears to reclaim the 200-day simple moving average during this period despite several modest penetrations.
As well, and more recently, there has been a powerful rally in the OIH ETF on good volume characteristics to consider. What’s more, the price action in these oil stocks also busted through secondary downtrend resistance. With a nice pullback now in hand, it’s our technical view OIH is readying to move into higher ground.
OIH Bullish Vertical Strategy
For likeminded traders interested in a bullish swing position, the OIH Nov $31/$32 bull call spread is attractive.
Priced for 35 cents with OIH at $30.15, the limited risk spread can return 65 cents or about 200% in over the course of a month’s time if the ETF can put together a rally of roughly 6% through expiration.
This oil stock trader could also look to try and improve their odds of success using money management during the life of the OIH vertical.
A 50% money stop on the spread’s full price in the event our technical thesis proves inaccurate is one way to practice money management and further reduce risk.
Alternatively, if an upside test of this year’s highs to occur in the OIH ETF, selling a vertical stationed at higher strikes is also worthy of consideration.
Investment accounts under Christopher Tyler’s management do not currently GLD or the derivatives mentioned in this article, but positions may change at any time based on market conditions. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
