Making a directional bet in Crude Oil is not for the faint of heart.
Even many shorts got shook out on this down move with CL’s volatility, but I believe a long term turnaround is inevitable.
Marathon Oil (MRO) has held strong in the face of lower oil prices, and is trading just shy of its 52-week high. The $38 level, which marks the 2007 peak, is resistance, but MRO has repeatedly held the midpoint support of the yearly trading range at $33. A breakout rally above the 52-week high near $38 targets a $5 move to $43.
The $43 target is about 19% higher than recent prices, but traders who use a capital-preserving, stock substitution strategy could see a 135% return on a move to that level.
You want to buy a high-probability option that has enough time to be right.
Choose a call option with a delta of 70 or above.
With MRO trading near $36.43, an in-the-money $33 strike call option currently has about $3.25 in real or intrinsic value. The remainder of the premium is the time value of the option. And this call option currently has a delta of about 75.
Also, buy more time until expiration than you may need — at least three to six months — for the trade to develop.
TRADE SET-UP
- Buy MRO April 33 Calls at $4.25 or less
- Set stop-loss at $2.12
- Set initial price target at $10 for a potential 135% gain in five and a half months
This trade breaks even at $37.25 ($33 strike plus $4.25 options premium). That is about $1 away from MRO’s recent price. If shares hit the $43 target, then the call options would have $10 of intrinsic value and deliver a gain of 135%.
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