Oil Market Update... Fundamental & Options trade of the year

So yesterday and today were very interesting days in the oil markets... more specifically in the Oil Services Sector. As you probably already know my two key holdings are RIG and SLB, both of whom were/are in a nice trading range. The horribly oversold sector as a whole is setting up for new 52 week highs. Why do I say this... Schlumberger.

Regardless of what oil does (which I believe is also in a trading range setting up for new highs) July 18, 2008 it all is laid out in the open, as for the long term outlook of North Amercia and the world at large for the Services Sector. Drawing on the words of the SLB CEO, Andrew Gould last quarters higher oil AND natural gas prices changed the business cycle in the oil industry. A cyclical downturn in the industry was stymied by higher than expected oil and natural gas prices. As we are all very aware these prices have gained strength in the second quarter being reported on July 18th.

This hard drop in SLB (and all of other stocks in the Oil Services Sector) has brought about a great buying opportunity to build a very nice pre-earnings position. I am currently accumulating slowly. SLB has not seen the levels it was at yesterday since before Q1 earnings. The truly sweet thing is SLB reports on options expiration day. This sets up some seriously profitable trading opportunities with insane returns. Also buy some hedging puts, not all of them expiring on Friday, June 18th. This will help if we get a surprise drop (unlikely but not impossible) as the drop will probably be multi day and could help you hedge the high volume drop against your core position.

Remember REs number one trading principle... protect your capital. SLB is setting up for an AWESOME trading opportunity on the long side, but have some downside protection so you can play another day.

The RE trade will look something like this:

July Calls (Near Money) SPECULATIVE
Core Position
August Puts (Near Money) HEDGE
July Puts (Near money same strike as the the August) HEDGE

By combining the August and Julys, you reduce your premium (that you will lose if we get our run up) but provide some very cheap insurance.

Now is the time to SLOWLY build your core position. Then on the 17th bring in your hedge and speculative trade. If we get the hard move up the speculative will easily pay for your hedge + some.




TheRichEngineer