Play TSO Calls

Plus: Coal, Oil Service, and Engineering

By Bryan Bottarelli
Monday, May 12, 2008 10:35 AM EDT
Mon, 12 May 2008 14:35:00 GMT

PLAY: Buy the TSO June 20 Calls (TSO FD) at or under $4.10, good for the day. Place a protective stop limit at $2.60 and a pre-determined sniper sell at $4.90.

Dear Bottarelli Research Member,

We’ve opened a new trading week with the major market averages barely hanging onto a gain. From the looks of today’s Dow chart, a break below the 12,750 level would most certainly lead to a re-test of the 50-day moving average at 12,500. And while the major market averages are not yet ready to make a directional decision, I can tell you that the bulls are certainly getting nervous.

INDU

In terms of our trading, I’m currently bullish on three market sectors: Coal, Oil Drilling, and Engineering. As noted last week, coal stocks like FCL and FDG were two of the only stocks offering positive signals (albeit weaker than what I’d typically like to play, which is why I have yet to make a recommendation). As a testament to coal’s strength, John Goscinski writes into the latest issue of Barrons to say, “I’ve been working in the coal business for 35 years and have never seen its fundamentals this strong.”

At the same time, oil service stocks like RIG, DO, WFT, and SII are all making nice pullbacks, and these down-moves could offer us a fantastic timing entry on a June call position. If RIG tests the 50-day moving average at $145 and holds, I’ll certainly establish a new June call position.

RIG

And finally, engineering companies like FLR and FWLT remain strong — as most of these firms have back-logs in excess of 18 months. With a global infrastructure boom in full effect (not to mention new oil plants, new nuclear plants, and a host of others in the works), the need for engineers is off the charts right now — and names like FWLT and FLR are the prime beneficiaries of this unprecedented demand.

FLR

So looking ahead, we could have strong trading opportunities on any of these three categories — given the proper timing. But to be honest, I’d like to see the markets firm up a little big before making any of these new plays. But in the meantime, I think we have a strong opportunity to make a new upside call play on beaten-down oil refiner Tesoro (TSO – NYSE).

TSO

As you can see from the TSO chart, the stock has gotten clobbered lately — as record-high oil prices have cut deeply into TSO’s refining margins. But today, the stock is putting in a little upside tick — based solely on the fact that oil prices are now coming off their highs. I think it’s quite obvious that refiners like TSO (and VLO as well) are grossly over-sold at current prices, and they’ll quickly find relief if oil prices move down. And as you can see from today’s action, it doesn’t even have to be a big down-move for money to flow back into TSO. That’s why I’d like to enter a June call play now.

And talk about a bargain! Look at the TSO June 20 Calls (TSO FD). With TSO stock currently trading for $23.18, the June 20 calls are $3.18 in the money. But to own these contracts, which carry over a month of time premium, you only pay $3.90. In other words, we’re paying next to nothing ($0.60) to carry this position into June, which is a heavily discounted price. Therefore, let’s add this position to our ledger now!

PLAY: Buy the TSO June 20 Calls (TSO FD) at or under $4.10, good for the day. Place a protective stop limit at $2.60 and a pre-determined sniper sell at $4.90.

Also, if the markets move south, we’ll also want to establish a new put position. I’ll follow later in the day with the appropriate trading action (if any). Until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

© 2012 CSR Group, LLC. All rights reserved. Published in USA.

Information, opinion, research, and commentary contained herein is obtained from sources believed to be reliable; their reliability, however, cannot be guaranteed. The maxim of Caveat Emptor applies — let the buyer beware. Bottarelli Research does not provide individual investment advice, act as an investment advisor, or individually advocate the purchase or sale of any security or investment.

Investments recommended in this service should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Bottarelli Research reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscriber’s initials will be used unless express written permission has been granted to the contrary.

CSR Group, LLC expressly forbids its writers from having a financial interest in any security recommended to readers. Furthermore, all employees and agents of CSR Group, LLC and its affiliate companies must wait 24 hours before following a published recommendation.

Bottarelli Research alerts contain time-sensitive information, and are published and distributed to members with urgency. Because of this, not all published materials can be adequately proofread, and an occasional spelling or grammar error may exist.


Other Options Alerts From May 2008