recommendation: buy call options in xle. what are options? right, not obligation, to buy or sell...
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Recommendation: Buy Call Options in XLE
What are options? Right, not obligation, to buy or sell an asset
at a certain price before a certain date Option premium 1 contract = 100 shares Delta
Types of options Call – Right to buy Put – Right to sell
You own Stock A at $50 a share Your sentiment: bearish
Sell 55 Call for $ 1 Two results:
Price eclipses 55 (ex. 60)▪ You have to sell at 55▪ So you make capital gain in stock plus the option
premium Price doesn’t pass 55 (ex. 45)▪ You don’t have to sell▪ So you make the option premium, hedging the loss
Stock A is at $50 a share Your sentiment: bullish
Sell 55 Put for $ 1 Two results:
Price eclipses 55 (ex. 60)▪ Nothing happens▪ You make the option premium
Price doesn’t pass 55 (ex. 45)▪ You have the obligation to buy at 55▪ Even though it is trading at 45, you have to buy at
55
Stock A is at $50 a share Your sentiment: bullish
Buy 55 Call for $ 1Two results:
Price eclipses 55 (ex. 60)▪ You have the option to buy the stock at 55
Price doesn’t pass 55 (ex. 45)▪ You don’t have to do anything▪ You only lose the option premium
You own Stock A is at $50 a share Your sentiment: bearish
Buy 45 Put for $ 1 Two results:
Price eclipses 45 (ex. 60)▪ You don’t have to do anything▪ You only lose the option premium
Price doesn’t pass 45 (ex. 40)▪ You have the right to sell the stock at 45▪ Protection from downside
ETF with companies from oil, gas and consumable fuels, and energy equipment and services
Corresponds to the price and yield performance of its holdings Ex. XOM, CVX, SLB, OXY, APC, HAL, BTU
Israel/Gaza conflict Middle eastern conflicts affect oil prices
IEA reported that US can pass Saudi Arabia in oil production within 10 years Previous report had Saudi holding until
2035 Low gasoline and oil prices
Near 18 month lows Recent Gulf oil rig fire
Hurricane Sandy and seasonal increase Shut down oil refineries, decreased demand from
businesses/consumers, crude/nat. gas prices down
Fiscal Cliff Threat of second recession decreasing demand
Eurozone Recession Eurozone 3Q GDP falls 0.1% (tightened 0.2% in
2Q) Unemployment reaches record high of 11.6% Growing economies increase energy demands
Coal has risen for the past 10 years, but EIA predicts a decrease in the near future
Natural gas has been fluctuating but overall trend is up
Energy sector has been beaten down Nearing lows of the past 18 months
Increasing conflict in Middle EastTrends of US Oil Production
Today’s Close: 70.9152 Week Range: 61.11 – 77.35Beta: 1.1Dividend/Yield: 0.33/1.71Average 3 mo Volume: 10.9 M
StrengthsAlternative fuels are still not developed enough to overtake oilNatural gas is seen as a cleaner intermediateProgress in technology
WeaknessesPOTUS agenda for renewablesLawsuits for spills and leaks create fear and aversionNorth American market’s showed weak 3Q
OpportunitiesBasins that have yet to be fully drilledOversea markets have seen a good 3Q increase
ThreatsPOTUS regulations on oil drilling and fieldsEurozone RecessionFiscal Cliff
Buy XLE 72 Call for 16 Mar 2013Energy has been beaten down the
past few monthsLock in a moderate gain, with low
risk
Sector: Energy Industry Group: Energy and utilities Current Holdings: PXJ, FEN, VPU, AMLP,
OXY, HAL Target (Current) Allocation: 7.23% (8.96%) Recommendation:
Buy 5 XLE 72 Call options for 16 March 2013 at $2.70▪ Cost: $1350 (plus commission)
Sell calls after a 25-30% increase▪ XLE increase to 72.38 – 72.67 (with a .43 delta)