LEAP Trader Update - April 18th
The massive jump in crude prices on Tuesday and the record earnings from BTU, CSX and others sent many of our positions to the moon. I do not believe this trend will continue without some profit taking. I would like to take advantage of this spike to sell some calls on those stocks with the largest moves. Shorts got caught off guard and they had to pay up to exit positions before the close.
After the bell CSX reported record earnings and blew away estimates with their strong projections. CSX is trading up +$2.00 after hours in addition to the +2.49 in regular trading. CSX has a very strong chart and we entered the position on a gap up trigger back on April 3rd. I believe CSX will continue higher but not until after the momentum traders leave the stock. I looked at the available calls thinking we could sell some premium but there is no premium to sell. The May $70 call with CSX at $69 overnight is quoted at only $1.00. It is likely to be more at the open but at only a dollar above the current price it is not worth the risk.
Southern Peru Copper (PCU) soared +$5.50 on news that production had increased due to the lack of copper from Grupo Mexico's La Caridad mine. A worker strike has entered its 24 day with no end in sight. Even if it was resolved tomorrow it would take weeks for the ore to reach the market and offset the positive price gains made by PCU. PCU closed at $99.92 after a +$10 sprint in the last three days. I believe the impact of the strike has been overdone in PCU. I am recommending we sell the May $105 call PCU-EA, currently $2.10, at the open on Wednesday. I want to keep a tight stop on it due to the current rally.
Sell May $105 Call PCU-EA currently $2.10
Stop loss $103.50
Petrobras soared +$5.47 to $96 on news of a pipeline deal with Sinopec and on the rally in crude prices. This +6% spike was a breakout over prior resistance at $90.75. I believe without additional news this spike could see some immediate profit taking. I am recommending selling the May $100 call currently at $2.05.
Sell May $100 Call PBR-ET currently $2.05
Stop loss $$101.00 (in the money)
Transocean Offshore (RIG) did not take part in the rally to the same extent as the rest of the sector posting only a +67 cents gain. RIG is struggling at resistance at $85. We have a very expensive position and need to reduce our costs. I am recommending selling the May $90 call.
Sell May $90 Call RIG-ER currently $1.80
Stop loss $89.
Peabody Energy (BTU) soared +5.39 on very robust earnings. This +10% spike is very unsupported and deserves to be sold. The May options have no premium so I am stretching out to June with a tight stop. I am hoping the severity of the spike will attract other sellers. Sell the June $60 Call with a tight stop.
Sell June $60 Call BTU-FL currently $2.20
Stop loss $60.50 (in the money)
Frontier Oil (FTO) gained +2.26 to stretch its gains to +8 over the last week. Resistance at $64 offers us a potential opportunity. FTO saw three serious downgrades two weeks ago but has nearly recovered all of its losses. I still believe sellers are waiting again at $64.
Sell May $65 Call FTO-EM currently $2.15
Stop loss $64.95
Everyone knows there is a distinct possibility of a sell the news event on the oil inventories on Wednesday morning. The new record price of oil is still at resistance at just over $70 on the May contract. It is the perfect place for selling to occur. However, shorts were killed when the positions they established at that $70 level was broken on Tuesday. I am betting they try to reinstate those positions on Wednesday if inventory levels are neutral. Oil inventories in the US are at an eight-year high. Yes, Iran and Nigeria are still problems but this rally is overdone. Like any breakout rally it can get even more overdone but the contract expiration is rapidly approaching. It is a game of chicken and those with May positions are running out of time.
Enter these positions only if you are prepared for the potential for a continued spike. Honor the stops and hopefully we will get a small pullback before the June contract becomes current next week.
The rally has turned many of our positions extremely profitable but I am not ready to take an exit. I believe the summer driving season will push prices higher. The only issue is timing and that brings us back to the potential for profit taking this week.