Investors remain fixed on round numbers these days: Dow 13,000… Nasdaq 3,000… VIX below 20.
But there’s another number that had our desk sounding the alarm on the market’s rally: $109. That’s where oil’s trading. But if the jump at the pump had some worrying about the sustainability of the economic recovery, it had our guys searching out crude opportunities. And on last Friday’s Options Action, the goal was clear: provide strategies to play crude on both the long and short sides.
On the long side, Oppenheimer’s Carter Worth and Mike Khouw said the best way to play oil’s rise was the most obvious: Exxon Mobil. With the stock ready to break out, Khouw suggested an outright call purchase. Specifically, he bought the April 90-strike call for $0.80. That call has now traded over 12,000 times and is by far the most active contract on the Exxon board. Imitation really is the most sincere form of flattery. His trade and breakdown are below.
MIKE’S EXXON OPTIONS TRADE
- BUY APRIL 90-STRIKE CALLS FOR $0.80
- HOW MIKE’S EXXON TRADE MAKES MONEY
- PROFITS ABOVE $90.80
- LOSSES BELOW $90.80
On the short side, Dan Nathan of riskreversal.com used the run in crude as an excuse to get short one of this year’s best performing Dow components: Caterpillar. The industrial giant has more or less moved in tandem with crude over the last two years. However, over the past year, there have been two instances where (CAT) has outpaced crude, and in both cases, it was the former that fell back to meet the latter. A similar dynamic is again at work, with (CAT) up some 70% from its October lows, while crude has risen just 44% in that time. To make a long story short, something has got to give, and it was Nathan’s contention that (CAT) was more likely to fall than crude was likely to rise. His trade and breakdown are below.
DAN’S CATERPILLAR OPTIONS TRADE
- BUY APRIL 110-STRIKE PUT FOR $2.40
- SELL APRIL 105-STRIKE PUT FOR $1.40
HOW DAN'S CATERPILLAR TRADE MAKES MONEY
- LOSSES ABOVE $109
- PROFITS BETWEEN $109 - 105
- PROFITS CAPPED AT $105
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