A Call Spread Can Collect on COG

by Tyler Craig | July 27, 2012 7:45 am

Consumers may not be all that jazzed up about the recent recovery in crude oil — it’s up 16% since the June low at $77.28. But traders playing in energy view the rise as a welcome development. The lift in oil has no doubt been one factor helping the Energy Select Sector SPDR ETF (NYSE:XLE[1]) capture the top spot in sector performance for the past month.

With the relative strength in the oil patch, many energy names have been able to maintain bullish charts, despite the general choppiness of the broader equities market. One member of the oil and gas operations industry that looks particularly intriguing is Cabot Oil & Gas (NYSE:COG[2]).

The stock is in the midst of an intermediate uptrend above all its major moving averages. After surging at the end of June, it has spent the majority of July building a base for what may end up being another leg higher.

What’s more, Wednesday morning’s knee-jerk sell-off in reaction to its earnings announcement was quickly reversed as buyers sallied forth to defend support at $38. With Thursday’s 6% upside follow-through, COG appears poised to break out of its recent trading range.

Trader’s looking for a cheap way to acquire bullish exposure to a further rise in COG’s price might consider purchasing the September 41-44 bull call spread. To initiate the position, traders would buy the Sep 41 call while selling the Sep 44 call.

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The initial debit paid at trade entry represents the max risk and will be incurred if COG sits below $41 at September expiration. The max reward is capped at the distance between strikes minus the net debit and will be captured if COG rises above $44 by expiration.

Given the sharp two-day rise in COG, a slight pullback or consolidation may be in the cards. Traders might consider waiting for a decisive break above resistance at $41.65 before pulling the trigger.

At the time of this writing Tyler Craig had no positions on COG.

  1. XLE: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLE
  2. COG: http://studio-5.financialcontent.com/investplace/quote?Symbol=COG

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