As the markets take a much-needed break from the continual climb north, volatility has made good traders be even more selective in the choices for long-term runners, including energy stock picks.
We have moved from weekly candlesticks retracing to monthly candlesticks retracing. But again, this is a healthy move because markets become unhealthy when they move straight up as they have for many months. My stance remains that market flow continues in a more neutral to negative flow.
Much of the fading in tech comes from sector rotation of large CTAs (commodity trading advisors) who use technical indicators and derivatives to create portfolios. These CTA's are rotating into the traditional energy sector, which has been largely ignored.
Energy Stock Poised For Sustained Growth
For this reason, energy stock Oneok appears as a viable and potentially lucrative choice.
This company is set to become the second-largest U.S.-based pipeline operator after its planned acquisition of Magellan Midstream is completed. It's positioning itself for long-term growth.
The IBD Stock Checkup for Oneok shows real strength among its competitors like Cool and Teekay Tankers. But the price action and the option chains give us better trading choices.
There are signals that the market might take a breather and leading stocks might grind in a range before breaking back north. Given that, the use of the calendar spread with a longer duration is suggested.
In the options toolbox, the long calendar spread wheel is a neutral to bullish position and estimates are that the near-term prices are within a range but will rise over the longer term.
Here's how the long calendar spread wheel for Oneok is created:
- Sell to open one OKE Sept. 15 67.50 call
- Buy to open one OKE Jan. 19 67.50 call
The total debit $2.35. The break-even cost for the stock is $69.85, which is the premium plus the strike price of the option.
When the September option expires (out of the money as we anticipate):
- Sell to open one OKE Oct. 20 67.50 call.
Working Through Energy Stock Trade
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 backstop.
If the chart stalls, the cost of the option in January could be negative as we collect premium each month. The goal is to lower our cost basis to position into the stock as well as reduce our risk for holding the position.
If the prices for OKE do not breach $67.50, we will sell the month at the expiration of the prior month.
The first debit and maximum risk is $2.35 per calendar spread. But this will decrease over time as we use the power of time decay in our favor.
The break-even price is $69.85 if we position the calendar and do not use the "wheel" concept to reenter the new short strike.
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 in IBD.
Understanding 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: if the stock does nothing, or the stock moves within a range. So we use this concept to minimize the risk of the market exposure.
Energy Stock Trade Management
Identify the key chart levels.
The weekly resistance zone sits near 70, and support sits near 55. As a tide determines the lift of all boats, expecting a range here is not out of the question.
Scenarios for the OKE long call calendar spread:
- The stock grinds lower but does not break the 55 price for more than three days and shows itself as favorable to the traders looking for longer term growth.
- Next scenario is the stock grinds higher but does not break the 70 price for more than three days and shows traders are not willing to pay more for the stock at the present time.
- The stock breaks out of either of these levels for more than three days and breaks our personal risk thresholds for the trade. In that case, we exit the trade.
- The stock holds these ranges until the December strike at 67.50 expires and we are able to sell four months of the premium. That potentially makes our break-even in the stock below 67.50, and likely 65 based on the current premiums. Why the December strike? We want to have each month before January expire worthless.
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
