Option Investor
Market Updates

Oil well fires in Iraq sparks oil service sector

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The major equity indexes are off their lows of the session, but still see a negative trade as traders begin digesting a reacting to news reports out of Iraq after last night’s strikes by US-launched missiles at select Iraqi targets marked the beginning of war with Iraq.

After Iraq attempted an unsuccessful offensive strike of its own by launching two missiles toward Kuwait with one missile disintegrated in flight and the other being intercepted by a Patriot missile, the Pentagon has confirmed that there are two oil wells on fire in southern Iraq. That news now has shares of Boots&Coots (AMEX:WEL) $2.10 (unch) rocketing off its lows of $1.05 and now moving to the top of today’s most actively traded stock in the market.

The news of the oil well fires has sparked morning bullishness in the Oil Service Index (OSX.X) 87.28 +2.12% in what has been a broadly negative morning trade in other sectors we follow each day. Morning sector losers have both the North American Telecom Index (XTC.X) 419.62 –0.98% and Combined Telecom Index (IXTCX) 120.69 –1% leading sector declines.

Marginal strength is now being seen in the Semiconductor Index (SOX.X) 328.27 +0.59% as there have been countering reports regarding Saddam Hussein. Some reports have surfaced that Saddam was injured in the “first strike” initiative last night and that a televised speech with Saddam wearing glasses and no makeup brings suspicion if that person was actually Saddam Hussein, or one of his thought to be 8 “look-alikes.” Other news agencies report the televised speech as authentic.

Coalition forces and the war effort against Iraq got a boost in the last 30-minutes after the Turkish Parliament voted in favor of allowing coalition forces to use airspace over Turkey. The Turkish government has not given the coalition permission to utilize Turkish soil for a northern ground attack.

The Dow Industrials (INDU) 8,225 –0.47 is lower by 40 points, the broader S&P 500 (SPX.X) 869 –0.52% is down 5 points, while the tech-heavy NASDAQ-100 Index (NDX.X) 1,068 –0.58% is lower by 6 points. On a broader scale, the NYSE Composite (NYA.X) 4,818 –0.55% is off 26 points, while the NASDAQ Composite (COMPX) 1,390 –0.48% is lower by 7 points.

In this morning’s market monitor, I suggested that traders that may have taken two of my previously bullish trade entry points from Dow Diamond (AMEX:DIA) $77 and $80 entry points, with positions each, look to raise some cash with the selling of the first positions. My scenario was that war would not take place until a weekend, and last night’s attack may have some near-term bullishness to my recent bullish target of $83 being at risk, and there may be potential for another pullback entry point near $80. Again... I believe it is going to be difficult, if not impossible to predict future events as the early stages of war unfolds, and using strategy of taking profits in partial positions, while still keeping exposure to both bullish and bearish trades at times is perhaps that best strategy for profit. Yes, there will be losses and there will be gains. However, gains will only be realized when they are taken off the table.

It is important in my opinion to win several small battles by taking profits as this improves the odds of traders winning the war with their account over the longer-term.

It is also my opinion that option traders should be buying at least 2-months expiration and preferably 3 months. This allows a trader to allow the trade time to work per your scenario. Then, should something “go wrong” with the scenario, there is then more time allowed for a trade to come back to you, where a loss can be taken, but a smaller loss that perhaps would be realized with a shorter- term expiration, where a decision become “forced” due to a drawing near expiration.

Jeff Bailey

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