Option Investor
New Plays

New Option Plays

Printer friendly version
Call Options Plays
Put Options Plays
Strangle Options Plays

New Calls

Holly Corp. - HOC - close: 64.64 chg: 1.14 stop: 59.95

Company Description:
Holly Corporation, headquartered in Dallas, Texas, is an independent petroleum refiner and marketer that produces high value light products such as gasoline, diesel fuel and jet fuel. Holly operates through its subsidiaries a 75,000 barrels per day ("bpd") refinery located in Artesia, New Mexico, a 26,000 bpd refinery in Woods Cross, Utah, and an 8,000 bpd refinery in Great Falls, Montana. Holly also owns a 45% interest (including the general partner interest) in Holly Energy Partners, L.P., which through subsidiaries owns or leases approximately 1,600 miles of petroleum product pipelines in Texas, New Mexico and Oklahoma and refined product terminals in several Southwest and Rocky Mountain states. (source: company press release or website)

Why We Like It:
The oil sector is still moving higher. We had somewhat expected the oil sector to be relatively weak between now and late April, which is when we expect the group to start ramping up as investors prepare for the summer driving season. However, we don't want to fight the trend and right now the trend is still bullish. Driving bullish expectations over oil are concerns about Iran's nuclear ambitions and Iran's opinion that OPEC should announce a one million barrel per day cut on oil production. While we don't expect the cut proposal to pass OPEC at this time there seems to be a growing terror premium, for lack of a better term, over Iran's nuclear progression. Plus, it was only a couple of weeks ago there was a quarrel over natural gas between Russia and the Ukraine. The U.S. might be enjoying a balmy winter but the rest of the world is feeling the cold and that drives up energy usage. HOC has a pretty bullish daily chart with a series of higher lows and multiple bounces from technical support at the rising 100-dma. If shares can trade over $65.00 again it should reverse the P&F chart into a new buy signal. The high for the stock is $65.45 back in October 2005. We are going to suggest a trigger to buy calls at $65.65. If triggered we'll target a quick rally into the $69.75-70.00 range before the company's early February earnings report. We do not want to hold over the earnings report.

Suggested Options:
We are suggesting the February calls but traders might want to use March calls since they have more open interest. The following options are listed for reference. We are not suggesting any particular strike to buy. You, the individual trader, should choose whichever option best suits your own trading style and risk.

BUY CALL FEB 60 HOC-BL open interest= 60 current ask $6.30
BUY CALL FEB 65 HOC-BM open interest= 94 current ask $3.20
BUY CALL FEB 70 HOC-BN open interest= 3 current ask $1.30

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 02/06/06 (unconfirmed)
Average Daily Volume = 303 thousand

New Puts

None today.

New Strangles

Encana Corp. - ECA - close: 45.56 chg: 0.51 stop: n/a

Company Description:
With an enterprise value of approximately US$50 billion, EnCana is one of North America's leading natural gas producers, is among the largest holders of gas and oil resource lands onshore North America and is a technical and cost leader in the in-situ recovery of oilsands bitumen. EnCana delivers predictable, reliable, profitable growth from its portfolio of long- life resource plays situated in Canada and the United States. Contained in unconventional reservoirs, resource plays are large contiguous accumulations of hydrocarbons, located in thick or areally extensive deposits, that typically have lower geological and commercial development risk, lower average decline rates and very long producing lives compared to conventional plays. The application of technology to unlock the huge resource potential of these plays typically results in continuous increases in production and reserves and decreases in costs over multiple decades of resource play life. (source: company press release or website)

Why We Like It:
We have not had the best performance with strangle plays over the last couple of months. We do feel more confident in adding ECA as a strangle candidate since odds are pretty strong that crude oil will probably continue to be a market-moving catalyst in 2006 and ECA has a rather volatile past. Shares of ECA have not rallied with the rest of the oil sector over the past couple of weeks. Instead the stock has been consolidating sideways between support near $44 and additional support at the rising 200-dma (43.00) versus short-term resistance at the 50-dma near 46.27. The company is expected to report earnings in late January and that should spark some more volatility again. We're going to suggest opening strangle positions in the $44.00-46.00 range. We would prefer to open new positions in the $45.25-44.75 region. We are using the April $50 calls and the April $40 puts. At current prices that means we're betting that ECA will be trading under $36.50 or over $53.50 by April option expiration. An alternative strategy would be to buy a $45 straddle but that would cost about $7.40 at the moment and we're not suggesting it.

Suggested Options:
This is a strangle play. This involves buying an out of the money call and an out of the money put. We are suggesting the April $50 calls and $40 puts. Our estimated cost today is $3.45. Our target is going to be a rise to $5.95. Try and balance your investment to have an equal amount of capital in both calls and puts.

BUY CALL APR 50 ECA-DJ open interest=16955 current ask $2.20
BUY PUT APR 40 ECA-PH open interest= 5351 current ask $1.25

Picked on January 10 at $ 45.56
Change since picked: 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 4.4 million

New Play Archives