Option Investor
Commentary

Painful Buying

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We knew last weekend that a miss by Dennis would pressure oil prices and that is exactly what happened. Oil fell from $62 to $58 and oil stocks got clobbered. The dip should be temporary with another spike due with the Wednesday inventory reports. We also had a miss by hurricane Emily that veered away from the Gulf oil fields and farther to the west. It is still possible Emily could cause problems but I would not count on it.

When Dennis posted a clean miss I had hoped we would get a strong buying opportunity for a couple more positions. We did add a couple but they were on breakouts instead of breakdowns. We still have a full wish list and any further dips this week could garner a couple more.

I did not get any complaints this week about adding some non-leap plays to the watch list so I assume everyone is happy to have something new to trade.

If the dip does continue we have strong support at $56 and again at $54 with the 100-day average at $55.50. Continue to buy the dips until further notice. When the August contract ceases trading we should get another spike higher as we move closer to the end of year high demand months.

The Unocal/CNOOC/Chevron deal is still pending and Chevron is dropping in price as everyone expects them to raise the bid to grease the skids. Opposition is still rising to CNOOC and I strongly doubt they will win. This sets up a positive event for Chevron. They will either get Unocal and the stock will rise when the uncertainty passes OR they will not get Unocal and the stock will rise on relief. I consider any Chevron dip prompted by a higher bid as a buying opportunity.

It was interesting to see what stocks were up on Friday in the oil sector. Most were down with several up a few cents. Only SUN and VLO tacked on big gains of more than a buck. Makes me wish SUN was in the portfolio but their options are very expensive with at the money leaps nearly $20. Pass again!

BP came very close to a watch list trigger once again. The problem with BP is the Thunder Horse platform, which is threatening to sink into the sea. BP owns 75% of the platform and XOM 25%. If it sinks it is a $2 billion loss. If they rescue it I would buy BP immediately on the weakness. Options are cheap at $4 for the 2007 $70 leap. BP has pledged to return all cash received over $20 a bbl to the stockholders. This will be done though dividends and stock buybacks.

While crude oil softened on the hurricane news we saw natural gas spike over $8 on the current contract. This is an all time high and the December contract is bumping $9. This makes gas plays like CHK, SWN, RRC and MRO even stronger.

We are going to start getting earnings from most companies over the next couple weeks so expect some volatility.

December Crude Chart - Weekly

December Natural Gas Chart - Weekly

 

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