EOT Trade Alert – February 27, 2012

| February 27, 2012

February 27, 2012

Trade Alert:

  Buy MRO July 2012 $36 Calls at $2.35 or better

Company Background:

Marathon Oil Company (MRO) is an independent international energy company engaged in exploration and production, and oil sands mining.  MRO has operations in the US, Angola, Canada, Equatorial Guinea, Indonesia, Iraqi Kurdistan Region, Libya, Norway, Poland, and the United Kingdom.

Short-Term Catalyst:

Oil is on the move, and it’s heading higher from here.

Concerns over the development of a nuclear weapons program in Iran has led to trade sanctions from the US and the European Union.  The rhetoric from Tehran has escalated from a shutdown of the Strait of Hormuz, into the stoppage of oil export to European countries.

Here’s the strange part…

Iranian oil imports for Europe make up just a fraction of Europe’s oil buying, at just 0.6 million barrels a day.  According to Societe Generale, European countries have already reduced their Iranian oil demand to just 0.3 million barrels a day as of March.  So the reality and perception of Iran’s actions are two very different things.

In the oil markets, perception is what drives pricing… not reality.

Now, MRO is set to benefit from the coming spike in oil prices.  As an oil producer, Marathon can only benefit if the price of oil products rise.

And with things just heating up in the Middle East, it may be a while before prices settle down.  On top of which, we’re heading into the summer driving season shortly. Prices of oil typically rise during this part of the year.  So we’re looking at a number of factors which should drive oil prices higher from here.

In addition, Marathon’s fundamentals are among the best in the industry right now.  For example, MRO has a very low forward P/E ratio of just 8x.  That’s amazingly cheap compared to the industry average P/E of 14.1x.

From a technical standpoint, Marathon recently broke out to new 52-week highs and has clearly surged over and above its 50- and 200-day moving averages.

Let’s pick up call options on MRO now to profit from a further spike in oil prices due to the instability in the Middle East.

Trade Details:

Underlying Stock Symbol: MRO
Current Bid-Ask Price: $2.01 – $2.10
Option “Buy Up To” Price: $2.35
Break-Even On Stock At Expiration: $38.35
Maximum Risk Per Contract: $235


Exit Strategy:

MRO is trading at $35.01 per share.  Resistance levels will be at $42 and again at $50. Remember, we want this stock to move higher.  Support levels will be at $30 and $27.50.  Conservative investors should look to exit at the first support or resistance level.  Aggressive investors may want to hold for a bigger move.



Category: EOT Trade Alert

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