The Oil Service HOLDRs Trust (AMEX:OIH) is a unique instrument that represents an investor's ownership in the stock of specified companies in the oil service sector. HOLDRs allow investors to own a diversified group of stocks in a single investment that is highly transparent, liquid and efficient. Each HOLDR is a fixed basket of stocks. They work operate much like ADRs; American Depositary Receipts, as the investor actually owns the shares of each underlying company, receives dividends, proxies, and annual reports from each. The HOLDRs are not managed, and once the companies and amounts have been determined they are fixed, no companies will be substituted. In this way, the HOLDRs differ somewhat from Spiders (SPDRs), or Standard & Poor Depositary Receipts and other exchange traded funds, which will add and delete stocks on a regular basis, usually in conjunction with an index that they are tracking.
A complete explanation of this issue, including the companies that make up each HOLDRs' particular industry, sector or group can be found here:
Oil Service stocks have been among the worst performing issues during the past week and although the group as a whole is somewhat oversold, the current trend definitely suggests a widespread rotation out of the group and into other sectors. In addition, the Oil Service HOLDRs was up nearly 20% for the year prior to the recent slide, thus there is ample room for profit-taking before a new base is established. Finally, crude prices have fallen significantly in the past week amid bearish inventory data and indications of a slowdown in demand. With these considerations in mind, we believe the majority of stocks in the Oil Service sector will (at best) move laterally in the near-term and traders who agree with that outlook should consider this position.
Fundamentals Chart Earnings Dates Analyst Ratings
PLAY (conservative - bearish/credit spread):
BUY CALL JUN-100.00 OIH-FT OI=2965 ASK=$0.20
SELL CALL JUN-95.00 OIH-FS OI=2786 BID=$0.60
INITIAL "NET-CREDIT" TARGET = $0.45-$0.55
POTENTIAL PROFIT (X 5 contracts @ $0.45) = $225
MARGIN REQUIREMENT (X 5 contracts) = $2275
RETURN ON INVESTMENT (max) = 9.8%
COST BASIS = $95.45
INITIAL EXIT STRATEGY:
Once the position is open, traders should place a (contingent) order to close the short ($95.00) call options if the stock moves above $93.30 on an intraday basis. A "net-debit" order of $0.95-$1.00 to exit the entire spread may also be appropriate for some portfolios. Future adjustments to this loss-limit/exit point will be posted in the MCM Newsletter.