ConocoPhillips Has Dropped Into Solid Bargain Status

by John Kmiecik | February 11, 2013 6:15 am

Many stocks have enjoyed robust gains in this recent bullish run, but not every company has seen its shares consistently move higher. Here is a trade idea on a stock that has taken a fall — but whose cheaper price might have buyers interested once more.

ConocoPhillips (NYSE:COP — $57.87): Long Calls

The trade: Buy the March 57.5 calls for $1 or less.

The strategy: Buying a call option is one of the most basic bullish option strategies. The trade can profit if the stock rises and the call option increases in value as COP stock increases in price. Maximum profit is unlimited because COP can continue to rise, and the maximum loss is $1.00 or whatever was paid if COP finishes below $57.50 at March expiration. Breakeven is $58.50 based on a cost of $1.00 at expiration.

The rationale: It seems like many oil and energy companies have been moving higher over the last several months. ConocoPhillips was one of them until it released an unflattering earnings report at the end of January, which moved shares lower. COP reported a decrease in profits, but the company will spend around $15 billion in capital expenditure that should be able to lead to a compound annual growth rate of 3%-5% over the next several years.

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ConocoPhillips’ stock touched $62 in late January and is now trading just below $58. The stock reversed at $57 where it did back in late December, forming a double-bottom formation. Besides the double-bottom, the stock also formed a bottoming tail (hammer candle) — which is a potential reversal sign — on Thursday when Wednesday’s high was surpassed.

A bullish sign would be if COP can trade above Friday’s high of $57.87. The stock might not make it back to $62 by March expiration, but it should be able to move some of the way back. Use caution if the stock drops below $57.

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

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