Reducing Oil Risk

Add MRO Puts

By Bryan Bottarelli
Thursday, October 26, 2006 1:24 PM EST
Thu, 26 Oct 2006 18:24:00 GMT

Dear Bottarelli Research Member,

The volatility we’re seeing in oil companies is remarkable. At the open of trading, all of the oil stocks were in rally mode due to Exxon Mobil’s (XOM – NYSE) third-quarter profit that exceeded Wall Street expectations, pushing the stock to a new 52-week high at $72.17. This helped our DO December 75 Calls (DO LO) trade as high as $3.50, prompting me to attempt a quick gainer at the $3.30 level (or better).

DO

Thus far this price has not triggered, which is actually ok. Since we’re holding December contracts, we have the luxury of holding this position for the next two months — perhaps even adding to the play if conditions warrant. Continue to maintain your $3.30 sell order on DO.

But in the meantime, I think it’s a good idea to add some protective oil puts to our ledger as a way to buffer any short-term dips (similar to what we’ve witnessed today). Since we’re already positioned to the upside in the drilling and service area, it may prove wise to take a downside position in a pure oil company that’s gone up faster than their peers. And that brings me to Marathon Oil (MRO – NYSE).

MRO

If you compare the chart of MRO (above) with the chart of XOM (below) you’ll notice a clear distinction: MRO makes much more violent upside and downside moves compared to XOM. Not only that, but pure oil companies like MRO and XOM have been in rally mode while drillers like DO have recently suffered. If the great numbers reported by XOM cause a “sell on news” situation, MRO could easily drop in price. Therefore, we can essentially play one oil sector against the other by adding MRO puts to our ledger that already includes DO calls.

XOM

PLAY: Buy the MRO November 85 Puts (MRO WQ) at or under $2.30, good for the day. Current bid/ask spread is $2.10 to $2.25.

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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