Over the weekend, the global oil cartel OPEC announced plans to cut production by 1 million barrels per day by the end of the year. The news sent crude oil prices into the stratosphere.
West Texas Intermediate crude – the U.S. benchmark – rose more than 6% and pushed crude above $80 per barrel.
Goldman Sachs speculated that crude oil prices could push back to $95 per barrel year’s end.
I’m a little more cautious about crude prices. I continue to argue that investors and traders should speculate around crude prices hovering at or above $75 per barrel.
The cut signals steep concerns about the state of the global economy. It raises fears about OPEC’s timing.
Back in 2007, as the global economy faced turmoil, OPEC did cut crude prices. But it didn’t cut in any meaningful way until after the damage was done in December 2008.
If economic pressure persists, it will be difficult for oil prices to stay above $90 this summer.
The good news is that there’s a strong way to trade crude right now without significant speculation about higher prices.
Today, I want to show you my preferred way to trade oil prices in today’s environment.
How to Trade Oil: Let’s Sell Lower Prices
I’ve discussed how to trade Occidental Petroleum (OXY) in previous articles. But let’s look at another great name with a very liquid options chain. It’s Devon Energy (DVN).
With momentum positive, I’m not interested in chasing options much higher. When these moves happen, a lot of traders prefer to sell the news.
And that’s what happened in the first 45 minutes of Monday’s trading. Look at the chart. People took profits.
Instead of buying calls and speculating to the upside, I can focus on selling options to generate income and make money so long as momentum remains positive in the sector.
I start by going out 45 days on DVN and find an attractive price where I’d be content to own the stock.
DVN has found some support down around the $50 level – and if the stock does pull back to these levels, I want to own it.
If I sell that put, and the stock falls under that level, I’ll be assigned the stock. However, I’m betting that it either won’t get to that level, or I’ll just buy the stock. That’s a no-brainer.
The June 16, 2023, $45 put sells for $1.15. I can sell that put.
Instead of putting up $4,385 in margin to sell a cash-secured put, I’ll buy a put under that level to add protection against any significant selloff or surprise event.
In this case, I’ll buy the June 16, 2023, $40.00 put for $0.50.
I’m putting up $435 in margin to make $65.
That’s a 14.5% return over three months. It has a 85% probability of profit. And the annualized return is 75%.
Now let’s look at the scenarios:
- If the stock goes up, the value of the spread goes down. As a result, we make money.
- If the stock just trades sideways, the value of the spread will decay. As a result, we’d make money.
- If momentum is positive and the stock pulls back, we’d be happy to own it at a lower level. But if momentum goes negative, we can just cut our losses and look for an opportunity to reenter this position.
You can make this trade, and feel confident. If momentum turns negative, we just cut whatever gains we have and move on.
Simple as that.
To your wealth,
Garrett Baldwin
PS: Today, I went live to reveal one of the greatest financial secrets of our time. I explained how to identify the best value stocks in the world – in a simple strategy that you can do yourself. If you missed it, please checkout the replay here. This is – by far – the most important lesson you can learn about the market as we start the second quarter.
Market Momentum is Green
We had very strong reversions over the last week, and it’s not surprising to see some profit taking.
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
