Disorder in the oil markets is stealing headlines everywhere. But energy stocks like Marathon Oil (NYSE:MRO) are holding steady despite the unprecedented price moves in crude. If you have an interest in bottoming fishing MRO stock, I suggest using options to enhance your chances.
I’ll show you a strategy that will pay you a beefy return while you’re waiting for a recovery. But first, let’s recap what’s going on with crude.
Oil Shenanigans
Oil has entered bizarro land, and there’s a great deal of head-scratching going on. Negative interest rates were one thing, but now we have to grapple with negative oil prices? The poor commodity is so useless right now that producers can’t even give it away. For free! It’s like one of those old, thousand-pound Panasonic rear-projector TVs that require you to pay someone to take off your hands or the city fines you for leaving at the end of the driveway for Tuesday’s trash pick-up.
May oil futures contracts crashed to negative $37.63 per barrel this week. June contracts cratered as well, but are still in positive territory ($14.24 as of Wednesday’s close). The Saudi-Russia oil price war has come at a time when global demand for crude has fallen off a veritable cliff due to a global pandemic that has cars parked and planes grounded.
Eventually, the supply-demand imbalance will right itself, and oil will find an equilibrium above zero. In the meantime, however, energy companies are seeing their earnings crumble, and balance sheets bleed.
MRO Stock Chart
Houston-based Marathon Oil has been extremely hard hit this year. It entered 2020 at $13.58 and fell to $3.02 before finding a bottom. And it’s not apparent yet if that was the ultimate low, but I’m emboldened by the constructive price action we’ve seen since.
The weekly trend saw a massive increase in momentum during March’s crash. Bulls will point to the huge volume spike as a potential sign of capitulation. Perhaps the weak hands have now been shaken out, and the remaining downside will be minimal. The stability that has cropped up certainly suggests as much.
The next earnings report on May 6 will give shareholders a glimpse at how much the company is suffering while oil prices plumb the depths. MRO stock is down around 60% since last quarter’s report so a great deal of pain has already been priced in.
On the daily view, the stock’s sideways consolidation had enough upward tilt to carry it back above the 20-day moving average. Volume patterns have turned more bullish along the way as well, with distribution disappearing. The beginning of April saw six accumulation days accompany the rally that carried MRO to the upper end of its range.
Watch the $5 level. A rise above that could spark the beginning of a gap fill.
Covered Calls for Cash
While we could suggest buying Marathon shares outright, I like the idea of selling covered calls for income and protection. That way, if the stock stumbles after next month’s earnings, you’ll have some premium to offset part of the losses.
The covered call consists of selling one call option for every 100 shares owned. You are obligating yourself to sell your shares in exchange for getting paid a premium. Typically we sell short-term contracts to capitalize on the higher rate of time decay. We can also use an out-of-the-money strike price that provides room to profit on the stock before we have to sell it.
The Trade: Buy 100 shares of MRO stock and sell the May $5.50 call for around 30 cents.
If you purchased the stock for $4.80 and received 50 cents of premium, then your cost basis is $4.50. The 30 cents of cash flow translates into a 6.66% return. And if MRO rises above $5.50, you’ll make another 70 cents on the stock for a total potential reward of $1.00 or 22%.
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