Option Investor

Busy Week For New Positions

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Last week I applauded the drop in oil prices and added a bunch of new possibilities to the watch list. I put breakout triggers on some just in case the dip was a head fake. The oil spike on Monday to $66.25 triggered several positions. Unfortunately hindsight is 20:20 and we know today that oil collapsed again to close at $62 for the week. The good news is that we did get entries on the end of week slide. The bad news is the Monday positions are underwater. It is not the end of the world but it is frustrating. Personally I would rather have the current set of plays than be sitting here watching oil move higher and not have any. You sometimes have to take the bad with the good.

We were stopped out of the Freeport McMoran position when Indonesia said they wanted to renegotiate the contract with FCX. It provides for a profit sharing split and with the recent spike in gold they felt they were not getting their fair share. It appears they took a page out of the Hugo Chavez playbook. Chavez has billed all the energy companies operating in Venezuela for back taxes because he decided the prior profit sharing arrangement was not rich enough for his tastes. Evidentially contracts are meaningless in some countries.

Natural gas supplies have risen to 36% over the five year average for this time of year and the Northeast is just now getting their first real winter storm of the year. Gas prices fell to $7.33 on Friday and they are not expected to rise before air conditioner season begins to strain supply. This will be in July and prices could easily fall even further.

Oil prices should continue to fall with real support in the $58 range and OPEC support around $55. Personally I don't believe it will drop much below $58 because OPEC members will start talking about production cuts under $60 in an effort to talk prices back up. This means the $62 close on Friday should be very close to where funds start bargain hunting ahead of the summer demand cycle.

Sunoco was hammered for a -$24 drop over the last week as funds took profits from their Q4 momentum plays. I am adding it as another new play today since strong support is only a couple dollars away.

I am also recommending some dollar cost averaging given the dip in prices since Monday. Adding another contract of two in a couple positions will allow us to take advantage of the additional drop. I will detail my suggestions in the appropriate plays.

We have been waiting for this drop in oil prices since the rally began in late December. The low for December was on 12/27 and we were stopped out of several energy plays on that day only to see oil rally on the 28th from $58 all the way to $69 on January-20th. It was very frustrating to see that spike while we sat nearly naked of energy positions. I told you the dip would come and we could easily see $58 again over the next two weeks. Patience does have its rewards. Now the tension will begin to build as we wait for the next move higher in prices. Will it be in February, March or even April? Nobody knows but the key is to be fully invested before it begins.

Because of the decline in oil prices this week insurance puts are too expensive to add to current plays. Hopefully we will get a bounce next week that will deflate some of the premium. If not we will sell some calls to offset the prices of the LEAPS.

There is a lot of red on the positions table this week and it is almost entirely due to new positions triggered on the Monday spike. We will work out of the deficit but it may take a few weeks. Be patient. Use VLO as an example. We have lowered our cost in that LEAP from $6.60 to $1.60 and could be under $1 soon. It takes work and a little help from the market but once we have the positions we can whittle them down.

Stop losses, where applicable, were left VERY loose due to the expected dip in oil to the $58-$60 range. If the stops are too wide for your risk profile please adjust them accordingly.

Natural Gas Chart - Weekly

Crude Oil futures Chart - Weekly


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