Within the oil patch, Occidental Petroleum garners plenty of attention these days, even though oil prices have calmed down. Therefore, today's column showcases a long call calendar spread trade in OXY stock.
Active traders and investors are pushing prices in the broad indexes to all time highs as we awaited positive Univ. of Michigan sentiment readings reported earlier this morning.
It is likely that we test support levels and areas of price congestion in the general stock market before the next leg up. So, prices still appear more favorable in the overall bullish context of the stock market.
OXY Stock Today: The Background
The take-away here? Wait for the nice pullbacks, then go long.
Oil futures, as measured by WTI light sweet crude prices, are finally showing some measure of breakout action. And this is what leads me to Occidental Petroleum. With Warren Buffett holding a significant position here, there is a floor naturally in OXY stock. Earnings are set for Feb. 14 after the market opens; management will hold a conference call the next morning.
Some of us will choose to wait until after the earnings release to take the trade. Some may choose to position ourselves in front of the move. That decision is a personal-risk event.
Why A Calendar Spread?
The long call calendar spread is a neutral to bullish position. The trade estimates that prices will rise over the longer term to deliver stellar results. We can take advantage of any dips in the market to position in the stock of our choice, all the while holding on to the position through any big spikes.
Consider this setup for a long call calendar spread in OXY stock:
- Sell to open 1 OXY Feb. 16 60 call
- Buy to open 1 OXY March 15 60 call
Total debit in this trade comes out to $0.53 per set of contracts, or $53. Therefore, we get a break-even cost for OXY stock at 60.53, or the price of the first long option strike plus the net cost of the call options.
Defending The OXY Stock Trade
The ideal strategy result gives us four choices to exit the trade.
One, sell the entire calendar spread once it carries an acceptable profit. Two, sell the entire calendar spread once it hits your loss threshold.
Three, sell the entire calendar spread with a swift upward price move right after entering the trade — with more than 2 weeks to expiration of the February strike. And four, allow the short call strike of the calendar to expire worthless. Then determine if you would like to create a new spread by selling another call against the March 60 call at a higher price. This will turn the March event into a long call spread, but that will limit potential upside.
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.
The goal of taking the calendar trade is to gain exposure to profit, but to also significantly limit loss if we are incorrect. Options sellers are positioned to win in two ways — the stock does nothing, or the stock moves within the ranges. We use this concept to minimize the risk of market exposure.
Identify Key Chart Levels
The monthly resistance zone sits near 67. Support for OXY stock sits near 55. If we see some sharp dips, we will be in a position to potentially add to the position as long as market indicators show increased probabilities of more upside. This will increase your risk, so think this through. Be patient in the current flow and realize that there are some macro events that could result in volatility.
Key Scenarios For The Trade In OXY Stock
- OXY stock dips lower after earnings and does not break 55 for more than three days. That shows itself as favorable to the traders looking for longer-term growth. We should look for bounces in the days following to confirm the strength of the chart.
- Occidental grinds higher much earlier in the cycle and the option position increases in value by more than 100%. We could certainly choose to sell the entire position, freeing up more capital to trade.
- OXY stock grinds higher. It tests or breaches 510 price but immediately retreats. Traders are not willing to pay more for the stock at the present time. Ideal if it occurs in the near term and into the February expiration strike.
- The stock breaks down in volume for more than three days and breaks our personal risk thresholds. We exit the trade.
- We must consider closing or adjusting this trade if the stock creeps into 60 as we approach February expiration. This makes things a bit tricky into earnings. But a big move will bring us immediately into profit, so long as near-term volatility does not dramatically rise. We will have to surrender March's option to cover the in-the-money February strike.
Final Words
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
