Dear Fellow Trader,
Stop what you’re doing.
There’s money to be made.
For some reason, people act like oil prices are going to collapse.
Do you know who doesn’t? Warren Buffett.
Do you know how I know? Because he keeps buying up shares of Occidental Petroleum Company (OXY). Last month, we learned Berkshire Hathaway (BRK.A) bought another $246 million in shares of the Houston-based driller.
Occidental is one of my favorite stocks to trade.
And today, I’ll show you one of my favorite options strategies to boost income, increase your chance of winning, and the specific metrics that catch my attention.
Let’s dive in.
Trading OXY
Occidental is a major player in oil production in Texas. If you’re a baseball fan, prepare to see a lot of Occidental advertising on the jerseys of the Houston Astros.
Shares are currently around $61.00.
Occidental has an average price of $74.00 from Wall Street analysts with a larger upside of $84.00.
I think the upside is higher. Why? When the company’s debt returns above Investment Grade, it’ll be a very attractive opportunity for institutions.
Occidental is rated BB+, just below Investment Grade. As the company continues to pay off its debt, increase its dividend, and buy back stock, it will be even more attractive.
OXY currently has an F score of 7, but future buybacks will increase that figure. In addition, it trades at a very low enterprise value to earnings before interest and tax (EV/EBIT) of 10x.
Its net margin is north of 18%, historically strong against the industry and its relative historical performance.
And then there’s Warren Buffett.
Berkshire Hathaway has permission from regulators to buy up to 50% of the company. Knowing how and where Buffett buys the stock is very important.
Take a look at the chart below.
Occidental has been a terrific momentum stock in the last 18 months.
However, it bottomed out on three occasions in the last year.
First, during the massive hedge fund dump in June 2022.
Second, during the global liquidity challenges in October 2022 (thanks a lot, United Kingdom).
And third, a recent downturn linked to a lack of financial interest in oil from commodity traders due to recessionary concerns.
In each case… Buffett has bought the stock.
Berkshire isn’t buying up shares when the stock pops above $70.
Berkshire is stalking – waiting to buy OXY when it gets back around $60.
That’s the Buffett Buy Zone.
You should follow this pattern as well.
How do I Trade OXY?
You could build a trove of OXY stock like Berkshire if you’d like, but there are better ways to trade it.
The best way is to sell a put spread on OXY in positive momentum conditions. So, when capital is flowing into the market – and the energy sector, I like to go back down into the $50s and sell spreads.
I start by going out 60 days on OXY and find an attractive price where I’d be content to own the stock. Given that Buffett liked buying the stock around $58, I keep my eye on the $55 put.
If I sell that put, and the stock falls under that level, I’ll be assigned the stock. However, I am betting that it either won’t get to that level, or I’LL GLADLY buy the stock because it’s likely set to rebound (when Buffett likely makes another purchase).
In fact, with the stock now down in , why not go lower.
Typically, if I’m selling a $55 put, I will need to put up a significant amount of margin. In the case of OXY, the January 19, 2023, $55.00 put costs about $0.52.
This means I’d only generate about 1.00% on my return if I just sold a cash-secured put. I’d also need about $5,450 in margin.
That’s not what I want.
So, I can buy the $52.50 put and protect myself in the process. If the stock falls under $50, the most I can lose is the margin between the $55 and $52.50 spread.
If I sold this spread, I’d require about $224 in margin to make $26 over the next 60 days. That’s a 11.1% return with a probability of profit of about 87.3%.
Now, this is strictly an educational trade.
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.
Rather than expose ourselves to $5,450 in equity risk today, it’s really clean to trade these put spreads and seek optimal gains.
This trade itself offers an annualized return of 68% – meaning you can do this over and over again in optimal conditions – and make nice gains on lower-risk strategies.
Enjoy your day,
Garrett Baldwin
