Traders are buying the crude oil dip with aggression this morning. The surge should bring renewed optimism to the space and it provides a good reason for re-assessing the energy sector for trade ideas. Marathon Oil Corporation (NYSE:MRO) has been on my radar for the past month, and it’s time we give MRO stock its due.
One of the silver linings of a market correction is the ease with which we can identify relative strength. Stocks that remain firm while the market is melting reveal muscle-flexing that is sure to lead to higher prices once the broader selling pressure abates. We’ve seen that play out in spades for MRO over the past month.
While the rest of the market has been playing fiddle in the middle, Marathon Oil has been carving out a series of higher pivot highs and higher pivot lows. Its path has been one of basing and breaking. The past two consolidation spurts ended with powerful upside breakouts. With the stock now back above every major moving average, the bulls have officially wrested back control.
Further buttressing buyers’ dominance are volume patterns. We’ve seen nary a whiff of distribution over the past month and accumulation days are on the rise.
No matter how you slice it, MRO is one of the healthiest specimens on the Street. If you’re a believer in strength begetting more strength, then this stock deserves a top spot on your bull list.
Let Marathon Oil Run for You
The cheap price tag ($16) and high volatility (implied vol is 48%) combine to create a killer combination for naked puts. To capitalize on both and position yourself to profit if MRO continues to power higher, sell the May $16 put for 62 cents. The initial margin requirement should only be around $250, so we’re talking about a mouth-watering 25% return on initial cost here.
The max reward of $62-per-contract will be captured if Marathon Oil sits above $16 at expiration. Remember, by selling the put, you are obligating yourself to buy the stock at an effective purchase price of $15.38. Personally, I don’t think that’s a bad entry point into the stock, but if you want to avoid acquiring shares then buy back the put if it sits in-the-money near expiration.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.