After enduring a mostly choppy trend in the past few months, investors may consider adding Apache Corporation (NYSE:APA) stock to their portfolio for the rest of the year. Specifically, there are three bullish plays in APA stock that I want to share with you, as each play could lead to impressive profits.
But before we dive into each trade, here’s a bit of background on what’s been going on with Apache stock recently. On Sept. 13, Apache Corporation, one of the largest U.S. exploration and production (E&P) companies out of Irving, TX, declared its regular cash dividend at a yield of 2%. Stockholders of record on Oct. 22, 2018 will be eligible for the dividend to be paid out on Oct. 22, 2018.
Furthermore, APA’s earnings call on Aug. 1, 2018 delivered solid results for Q2, with an earnings surprise of over 40%. After a five-year period of loss-making, APA management announced a profit of $1.24 billion. The upbeat conference call showed a company with a solid balance sheet that is positioned to improve earnings as well as cash flow even further.
Many analysts are also expressing optimism about APA’s Alpine High development with significant oil and natural gas reserves in West Texas.
While U.S. light crude prices briefly went over $70 a barrel last week, investors also turned their attention to oil-weighted energy companies, including APA stock. Apache Corporation’s main competitors include Exxon Mobil (NYSE:XOM), Pioneer Natural Resources (NYSE:PXD) and Devon Energy (NYSE:DVN). Over the past few years, oil companies have generally suffered from excess supply globally; however, I believe their stock prices are set to improve as 2018 ends and Apache stock is a good choice to go long among the other leaders of the industry.
APA’s 52-week price range has been $33.60 (Mar. 2, 2018) — $49.59 (July 7, 2018). Last week has especially been a good week for the stock, helping improve the technical chart.
Investors who pay attention to moving averages should note that they now give a solid “buy” signal. Short-term support for Apache is ﬁrst at $44.20 and then at $42.0; meanwhile, short-term resistance in APA stock is ﬁrst at $46.9 and then at $48.0. The stock has closed up in six of the last seven trading days. Therefore, a slight pull back might occur in the APA stock price during the rest of the week and offer an even better entry point for investors.
Depending on individual portfolio allocations and risk/return profiles, here are the three types of trades set up for APA Stock (prices are based on APA stock’s closing price of 46.26 on Tuesday, Sept. 18):
Three Bullish Strategies on APA Stock
1. Buy 100 shares of Apache Corporation stock at a limit price of $46.26. You should expect to hold this long stock position for up to one to six months for an approximate 8-10% gain. You may consider placing a stop loss at about 3% below your entry point.
2. Use a covered call whereby you would buy 100 shares of Apache stock at a limit price of $46.26 and at the same time, sell an APA Jan 2019 $45 call option, which currently trades at $3.92. The $45 option is slightly in-the-money (ITM), offering more downside protection in case of volatility and a decline in APA stock.
This call option would stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this covered call trade at the closing prices on Tuesday, Sept. 18, at expiry, this trade would break even at a APA stock price of $42.34 and the maximum return would be $266 at a price of $45 at expiry (excluding trading commissions and costs).
3. Sell a Jan 2019 $45 put option with a limit price of $3.38 — its closing price on Sept. 18.
This put option would also stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this put selling strategy at the closing prices on Tuesday, the upside is that you keep the premium as long as Apache Corporation stock closes above $45.0 when January options expire (excluding trading commissions and costs).
The downside is that if APA stock trades below $45 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $45 per share.
At expiry, this trade would breakeven at a APA stock price of $41.62.
The Bottom Line on Apache Corporation Stock
I believe a rebound in the APA stock price toward the $50 level is coming. However, as prudent investors, it is always crucial to maintain a clear risk/return profile. Thus, if the rebound does not happen, a test of the previous lows and toward the low $40’s level could be the next leg down.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.