Energy has enjoyed a continued climb over the last two months, so let's revisit Oneok, a top name in IBD's oil and gas transport and pipeline industry group. This column explores the concept of a calendar spread wheel in OKE stock.
Markets continue to be volatile but the clear undertone is that Oneok and other energy names are worth watching. The relative strength lines on OKE stock and other oil and gas names soared recently and tried to resist the downtrend pull of the indexes.
Looking for charts that continue to hold longer moving averages has become more difficult in what is truly a stock picker's market. My stance remains that market flow continues in a more neutral to negative flow. Markets are in a repricing mode, and that will mean price action will grind lower to acceptable values.
That brings us back for our third revisit of our calendar wheel for OKE stock originally introduced on Aug. 18.
To recap, Oneok boasts the second-largest U.S. based pipeline after its recent acquisition of Magellan Midstream. The buy positions Oneok for long-term growth. Note that the IBD Stock Checkup for OKE stock continues to hold relative strength among its competitors and the option chains are increasingly more liquid. The company still appears to be a viable choice of upward price projections over time.
We are placing a new calendar spread on OKE stock with a little twist. If you have been with us since the last writing, you may already be in the calendar wheel. In that case, you may have covered the short call spread at 67.50 and sold a new short call into November, thereby reducing the cost of the call in January. For those looking at OKE stock for the first time, as well as those in the trade, we can see the progression of the position and, if comfortable, add to the trade.
Based on signals that the market might continue to take a breather and leading stocks might grind in a range before breaking back north, we'll use a calendar spread with a longer duration.
Within the option toolbox, the long diagonal is a neutral to bullish position. This strategy estimates that near-term prices are within a range but will rise over the longer term.
OKE Stock: Setting Up A Diagonal Spread
Within the option toolbox, the long diagonal calendar spread (also a wheel) is a neutral to bullish position and estimates that the near-term prices are within a range but will rise over the longer term.
For the first part of this trade in OKE stock, consider this setup as a long calendar spread wheel:
- Sell to open 1 OKE stock Nov. 17-expiration call at a 70 strike price for 70 cents.
- Buy to open 1 OKE Jan. 19-expiration call at a 67.50 for 3.40.
Total debit for this trade comes out to $2.75 per set of contracts. We can calculate the break-even at OKE stock hitting 70.25. That's the price of the option premium plus the long strike of the spread.
Why would we want to manage a trade in OKE stock by entering several trades of some complexity? To make the cost of positioning benefit from price action over time.
The goal with this trade is to create a credit that will make the strike in January "free" or even a credit. I'm putting "free" in quotation marks because the deployment of any capital always involves opportunity cost of some kind.
Understanding The Diagonal Spread
Stock hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
Buying a diagonal calendar spread surmises price action will be somewhat sideways to up (in our current configuration) in the short term, but will break out to the upside the closer we get to trade expiration. Options sellers are positioned to win in two ways — the stock does nothing, or the stock moves within the ranges, so we use this concept to minimize the risk of the market exposure.
As before, the weekly resistance zone remains near 70, and support sits near 55. As a tide determines the lift of the boats, expecting a range here is not out of the question.
Trade Management
Consider these scenarios for the long call diagonal spread in OKE stock:
- OKE grinds lower but does not break 55 for more than three days. This shows OKE stock as favorable to traders looking for longer term growth.
- OKE stock grinds higher but does not break 70 price for more than three days. It shows traders are not willing to pay more for OKE stock at the present time.
- Stock breaks out of either of these levels for more than three days. This breaks our personal risk thresholds, and we exit the trade.
- Oneok stock holds these ranges into each prior month's expiration until, finally, the November strike at 70 expires worthless. This way we can sell three months of the premium — which potentially makes our break-even in OKE stock below 67.50, and likely 65 based on the current premiums that are based 30 days out.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
Be patient and allow price action to move around a range of your stops.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
