Drill for Oil Profits With Options

by Tyler Craig | September 12, 2012 11:36 am

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After rising swiftly from $87 to $97 in the first half of August, crude oil has spent much of the past three weeks consolidating its gains and looks poised to continue its uptrend. A break above resistance at $98 might be just the spark oil needs to kick off its next run that could very well carry it north of the century mark.

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One of the obvious choices to exploit continued strength in oil is the energy sector. Not surprisingly, the energy space has historically exhibited a strong positive correlation with crude oil prices.

The Market Vectors Oil Services ETF (NYSE:OIH[1]) appears to be offering a compelling breakout opportunity over the $41.50 zone.

Rather than buying call options outright, traders searching for a more conservative bet might consider buying a bull call spread. Because it consists of both buying and selling options, it offers less exposure to time decay and volatility. In addition, it also is cheaper and thus less risky. Finally, it boasts a higher probability of profit since it doesn’t require the stock to rise as much as a long call option would.

Traders can enter an October 41-43 call spread by buying the Oct 41 call and selling the Oct 43 call for a net debit of $1. The max risk is limited to the initial $1 paid at trade inception and will be incurred if OIH sits below $41 at expiration. The max reward also is limited to $1 and will be captured if OIH rises above $43 by Oct expiration.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. OIH: http://studio-5.financialcontent.com/investplace/quote?Symbol=OIH

Source URL: https://investorplace.com/2012/09/drill-for-oil-profits-with-options-bull-call-spread-oih/
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