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.
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 shows real strength among its competitors, but its option chains give us better trading choices than many of those competitors.
Meanwhile, energy has overtaken the vaunted semiconductor group as sector rotation in the broad market continues.
An initial trade in this name occurred on Aug 18, 2023; now, the short side of the call calendar was slated to expire Friday. This means we must create a rolling trade because the option in OKE stock is in the money.
Failing to cover before the end of the day will result in a losing trade as you will have to use the long Jan 19-expiring option to cover the short call in the money.
Within the option toolbox, the long calendar spread wheel 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 Calendar Spread Wheel
For the first part of this trade in OKE stock, consider this setup as a long calendar spread wheel:
- Sell to open 1 OKE Sept. 15-expiration call at a 67.5 strike price.
- Buy to open 1 OKE Jan. 19 67.50 call.
Total debit for this trade came out to a cost of $2.35 per set of contracts. We can calculate the break-even cost at 69.85 in OKE stock. That is, take the option premium plus the option strike price.
This calendar spread in OKE stock is now worth $2.70, based on recent trading. If you are so inclined, you may cover the entire position for the gain. However, if you would like to continue to increase your opportunity for revenue, consider the following setup, or part two:
- Buy to close 1 OKE Sept. 15 67.50 call.
- Sell to open 1 OKE Oct. 20 67.50 call.
This will create a credit event of $1.15 — again, based on recent trading. It reduces the total debit of the initial trade to $1.20. And we will do this in November as well, depending on price action.
The total debit will continue to decrease as we sell the calls against the cost of January's 67.50 calls we have in place as a back-stop. If the chart of OKE stock stalls, the cost of the option in January could be negative as we collect premium each month. The goal: lower our cost basis to position into Oneok, as well as reduce our risk for holding the position.
The Wheel Turns Again
If this trade is a brand-new setup for the reader, then consider this calendar spread setup below:
- Sell to open 1 OKE Oct. 20 70 call.
- Buy to open 1 CELH Jan. 19 70 call.
Total debit comes out to $1.73, based on recent trading. Therefore, break-even for this trade in OKE stock comes out to $71.73. Again, add the price of the option and the option strike.
It is still my contention that we have a bit of a price stall. Why? The energy rotation has been swift and should have some volatility on the way. But the upswing continues.
Stock-hunting using fundamental and price strength within the IBD methodology is where I firmly plant myself under the backdrop of the current economic backdrop. I use technical analysis to find ideal buying opportunities in conjunction with the tools for strength seen on IBD.
Understanding The Long Call Calendar Spread Wheel
Buying a calendar spread surmises price action will be somewhat sideways in the short term but will break out to the upside. Options sellers are positioned to win in two ways. One, OKE stock does nothing. Or two, Oneok moves within the ranges, so we use this concept to minimize the risk of 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.
Consider these scenarios for the long call calendar 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 holds these ranges into each prior month's expiration until, finally, we close the December strike at $67.50 or $70 (if the trade is new to you) or expires worthless. This way we can sell three months' worth of premium. This potentially makes our break-even level in OKE stock well below 67.50, and likely 65 based on the current premiums that are based 30 days out.
How To Manage The Trade
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
