Overview

Energy continues to be the topic of discussion. With the most recent events in the Middle East and increasing energy demands from emerging markets, this sector will continue to be heavily traded and watched by options trading investors.

ConocoPhillips

ConocoPhillips (NYSE: COP) operates as an integrated energy company worldwide. This large multi-national company operates through six segments: Exploration and Production (E&P), Midstream, Refining and Marketing (R&M), LUKOIL Investment, Chemicals, and Emerging Businesses.

COP is trading near its 52week high. Recently, the stock raised it’s dividend by 20% and authorized a share buyback of more than $10 billion this year. COP is due to report earnings the week of April 25, so traders may want to look at the May expiration cycle. May is a big earnings month for many energy and exploration companies. We have a continued bullish outlook in the sector, and would consider the following strategy:

Buy the COP May 75/85 call spread

This strategy uses two option positions with the same expiration date but different strike prices. Based on a closing stock price of COP at $79.68 a share, the investor could buy the May 75/85 call spread for $5.04. (Buy the COP May 75 Call for $5.80, sell the COP May 85 Call for $0.76). This spread allows the investor to capitalize on a continued up move with limited downside exposure.

Here are some of the pertinent numbers:

Breakeven for the spread is $80.04 at May expiration (May 75 strike plus the cost of the spread $5.04 = $80.04).

The maximum gain is $ 4.96 (difference between strike prices for the May 85Call – May 75Call = 10 – $5.04 = $4.96) or a return of 49.6%.

The maximum loss is defined buy the purchase of the spread which is $5.04.