Play HES Calls & X Puts

Oil Refiner Resurgence?

By Bryan Bottarelli
Tuesday, October 16, 2007 10:32 AM EDT
Tue, 16 Oct 2007 14:32:00 GMT

Dear Bottarelli Research Member,

With crude-oil futures breaking the $87 a-barrel mark to hit another all-time, I think it’s only a matter of time before we witness a bit-time resurgence in major oil stocks.

If you recall, we used to actively trade stocks like Valero Energy (VLO – NYSE), Hess Corporation (HES – NYSE), and Marathon Oil (MRO – NYSE) back when oil was $76.00 a barrel. And the reason we traded these names was because these stocks all had tremendous upside momentum as oil prices continued to inch higher and higher. But for some reason, traders and investors alike started leaving this sector — which forced the volatility on these names to come to a halt. As a result, we’ve moved on as well.

But now, as oil prices continue to move higher on supply worries, I think it’s only a matter of time before we see increased upside volatility in the major oil and gas refiners. And this sets up a wonderful play in Hess Corporation (HES – NYSE).Of all the major oil names, HES has the best-looking chart. As you can see, the stock is on the verge of making a breakout move above its latest high at $69.87.

HES

At the same time, the options string in HES offers us the best bang for our buck. The HES November 70 Calls (IGG KN) are only trading between $2.45 and $2.60 per contract, which is an extremely attractive price for at-the-money calls with over a month and a half of time premium. All things considered, let’s play a breakout on HES by adding these calls now! Here’s the play:

PLAY: Buy the HES November 70 Calls (IGG KN) at or under $2.70, good for the day. Place a protective stop limit at $1.80.

At the same time, let’s add some downside exposure via November puts on United States Steel (X – NYSE).As you can see, the stock has been trading in a tight range between $105 and $110 since mid September — and the recently-established double-top at $110 signals that the $105 level will most likely not hold during the next round of market weakness. If that’ the case, you can expect to see a move down to the 50 and 200-day averages at $97, which could lead to a nice $12.00 haircut. Let’s profit off this move using November puts. Here’s the play:

X

PLAY: Buy the X November 105 Puts (X WA) at or under $6.10, good for the day. Current bid/ask spread is $5.70 to $5.90. Place a protective stop limit at $3.00.

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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