Shares of Murphy Oil are forming an ascending base with a 43.30 buy point. If the stock breaks out, investors can start a position with shares or consider a bullish options trade.
A call LEAP is a long-term option used to express a bullish view on an underlying stock, and we'll go over that later.
If Murphy Oil breaks out past its buy point, one way investors can trade the move is by buying a January 2023-expiration, 40-strike call option.
The cost of this call option is currently around $8.70 and has a delta of 65, which is equivalent to being long 65 shares of Murphy Oil on inception.
The premium paid also equates to the maximum potential loss on the trade ($8.70 x 100 shares =$870). On expiry, if Murphy Oil is trading past 48.70 an investor will realize a profit on the trade. But if the stock rallies and gets overextended, an investor can take profits early by simply closing the call position. Keep in mind, the stock needs to rise above 48.70 to cover the cost of the premium on this trade.
In the case of Murphy Oil, investors should also consider a call LEAP over buying shares due to the relatively low level of implied volatility.
Current implied volatility for January options is 54%, while the stock has realized 57% volatility over the past year. With high volatility in the energy sector right now, it is quite possible that Murphy Oil will continue to realize heightened volatility. Because the LEAP trade benefits from volatility, the position will gain if implied volatility increases.
Energy Stock Murphy Oil Leads One Of IBD's Top Groups
Murphy Oil is ranked first in the oil and gas production industry group, which ranks third overall of IBD's 197 industries. The company also boasts a top IBD Composite Rating of 99.
Amid higher energy prices, Murphy's growth is expected to accelerate, with analysts expecting full-year EPS of $4.17, up drastically from $1.29 in 2021. Investors will get a first taste of the company's progress on these growth expectations when Murphy Oil reports first-quarter earnings on May 4. EPS is estimated at 63 cents with revenue of $638 million.
A word of caution: Due to lower liquidity in the options market, investors considering this trade should place a limit order near the bid and slowly increase it until a position is filled, as opposed to placing a market order.
