Options That Profit From Oil Uncertainty

The price of oil has continued its steady track upwards, forcing Americans to shell out more for gas and heating oil and to watch as increases ripple through the economy. Oil prices hit $100 per barrel this week with the benchmark West Texas Crude surging an incredible 18% just since Valentine’s Day. Feeding the price rise is uncertainty over the fast-moving events in the Middle East.

But one of the benefits of options trading is the ability to use the product to strategically address and profit from uncertainty. We asked several InvestorPlace experts to research and write up trading ideas designed to generate profits from the changes in oil prices and the uncertainty in the market.

Please check out these trades that range from oil producers like Suncor Energy (NYSE: SU) to explorers like Brigham Exploration Co. (NASDAQ: BEXP) to Exchange-Traded Funds (ETF) like US Oil Fund (NYSE: USO) that track the sector.

iShares US Oil & Gas Expl. & Prod. Index (NYSE: IEO)

By Sam Collins, Chief Technical Analyst, InvestorPlace

This ETF tracks the Dow Jones U.S. Select Oil Exploration & Production index which is composed primarily of U.S.-based energy companies like Occidental Petroleum, Apache, Anadarko, Devon Energy, EOG Resources, Chesapeake Energy and others. In the event of a serious international oil crisis, these stocks should outperform the international oil giants that are captives of the Middle East market. Last week IEO broke to a new high jumping from a tight advance line. The target for this investment is difficult to measure. But if crude oil was to exceed $110 a barrel, IEO could be targeted at $80 or more. Buy IEO April 70 Calls.

Suncor Energy Inc. (NYSE: SU)

By Sam Collins, Chief Technical Analyst, InvestorPlace

The recent merger with Petro-Canada made SU one of Canada’s largest oil and gas producers. It is focused on Alberta’s vast Athabasca oil sands, making it independent of operations outside of North America.  Compared with other international oil companies, SU is not only safe from problems in the Middle East, but its profit margins increase greatly when oil rises above $80 per barrel — making it a hedge against rising prices due to Middle East tensions. On Jan. 28, SU broke from a saucer formation. Our trading target had been $45 but with oil prices skyrocketing the stock could quickly hit $50. Buy SU April 46 Calls.

SPDR S&P Oil & Gas Exploration (NYSE: XOP)

By Jim Woods

One big fear emanating out of Libya is the potential cessation of the 1.4 million barrels of oil that the country exports each day. If we see a significant reduction in this output, it will mean persistently high oil prices. When oil prices are high, finding new sources of oil becomes crucial. Enter the stocks in the SPDR S&P Oil & Gas Exploration ETF (NYSE: XOP). The companies in XOP read as a who’s who of the oil exploration sector which stands to benefit mightily from higher oil prices. Options traders can take advantage of the potential windfall in the sector with the XOP Mar 63 Call.

Brigham Exploration Co. (NASDAQ: BEXP)

By Jim Woods

As the turmoil continues in the Middle East, doesn’t it make sense to extract the oil we have here in the U.S.? That’s what Texas-based Brigham Exploration Co. (NASDAQ: BEXP) specializes in doing. The company engages in the exploration, development, and production of onshore oil and natural gas reserves in the Rocky Mountains, Gulf Coast, and Anadarko Basin—all regions without either a dictator or a populous revolt to contend with. As you might suspect, the stock has surged due to the recent spike in oil; however, smart traders can still pick up the BEXP Apr 40 Call for more potential upside in this domestic oil producer.

US Oil Fund (NYSE: USO)

By Michael Shulman, Editor, Short-Side Trader

I prefer to play the fundamental demand for the actual product – oil, the black stuff turned into other stuff that fuels the world economy. I am sticking with fundamentals as I cannot predict what will happen in Libya or whether another major oil-producing nation will see massive riots.

USO is the ETF that mirrors the price of oil. Will it go up or down, and where will it be a year from now? Currently it is roughly $100, give or take a few bucks. Based on fundamental demand and failing production capacity in Mexico, Libya, Russia and elsewhere, there is a better than 50% chance prices will be higher in a year. There are two plays here – a purely speculative options buy and a covered call sale. The pure play is to buy the USO January 2012 LEAPs, and if you are truly cautious, there are USO January 2013 LEAPs.

Or you can buy USO outright and sell covered calls against it all year long. It has Weekly options and you can write them every Wednesday before the close. If USO stays flat, you have a return of 7% to 8%.

Schlumberger (NYSE: SLB)

By Michael Shulman, Editor, Short-Side Trader

SLB is the world’s leading oil service company, a great outfit that often trades with the price of oil but will take a hit when the market turns down. The company is a technology giant — some of the world’s most sophisticated technology is not used in your iPad but thousands of feet underground by SLB. And often a new field can only be put on line in optimal fashion using the company’s technology.

I just closed a short-term SLB call position in my service for technical reasons and earned a 53% profit. However, long-term this stock is the best pure play on growth in demand for oil and the new exploration and extraction services that this demand will generate. Look at the SLB January 2012 LEAPS, something out-of-the-money but close to the current price around $93.