Last week, headlines that OPEC’s Saudi Arabia was cheating on the production cap deal caused a tizzy in oil prices. Crude oil lost its precious $50 per barrel support. OPEC since backtracked its rhetoric, saying the extra production was to build internal reserves … but their claims fell on deaf ears.
Oil company stocks are understandably sensitive to the price of oil. So companies like Chevron Corporation (NYSE:CVX) also came under pressure last week. The timing for that was less than ideal, since CVX stock was still recovering from the dip it suffered on the earnings report.
Dips are usually entry opportunities into quality stocks. On the last dip, I successfully went long CVX and Exxon Mobil Corporation (NYSE:XOM). On Feb. 1, I shared a winning trade on how to catch the falling knife in CVX and XOM stocks. The trades were easy wins, and now I want to reset another set through the fall.
Click to Enlarge Fundamentally, CVX is a solid energy company with very little risk that is unique to its internals. Oil prices are under pressure but they are not likely to revisit the mid-to-low $30s, so the worst-case scenario for the next few months is not likely to be disastrous for Chevron stock. I want to sell risk against that potential. The trick is to find proven resistance levels behind which to hide.
CVX Stock Trade Idea
The Bet: Sell the CVX Sep $85 put and collect 85 cents per contract. This is a bullish trade with a 90% theoretical chance of success.
By selling the put naked, I am committing to owning CVX stock at $85 if it falls over 20% from here. So I only do this if I am able and willing to live up to my commitment. Otherwise, I will need to change this trade into a credit put spread instead to limit the risk.
Usually I like to balance my bets by selling upside risk as a hedge. In this case I won’t. I am confident that the time-to-expiration is long enough that I will be able to manage my risk against short-term price challenges.
When selling risk, time is an ally and I am not required to hold my options trades open through their expiration. I can close them at any time for partial gains or losses.
Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.