EOT Trade Alert – January 23, 2012

| January 23, 2012

January 23, 2012

Trade Alert:

   Buy BHI April 2012 $47 Puts at $3.45 or better

Company Background:

Baker Hughes (BHI) is a supplier of oilfield services, technology and systems to the global oil and natural gas industry.  BHI also provides industrial products and services to the downstream refining and pipeline industries.  The company was founded in 1987 and is headquartered in Houston, TX.

Short-Term Catalyst:

Shares of BHI have recovered off their lows, but it looks like this stock may have run out of steam.

Look, Baker Hughes is in a great industry, Oil and Gas Services.  But there’s no question this industry is under siege right now… literally.

Every company in the oil industry has to be concerned over activity in the Strait of Hormuz.  If you’re not aware, Iran is threatening a blockade of the waterway.  The problem this blockade would create is massive.  If you weren’t aware, over 40% of all the world’s oil supply passes through the Strait of Hormuz.  So a blockade could be a major problem.

Why a blockade out of Iran?

The EU is threatening an Iranian oil embargo because Iran refuses to shutdown their nuclear program.  And the only card Iran has to play right now is by cutting off all the oil that passes near its borders.

The way it looks now, the blockade may actually happen.  And if it does, this will have a major impact on oil prices and oil companies… including BHI.

If demand for oil services in the region is curtailed, drillers temporarily shut down rigs. And if there’s less oil drilling going on, there’s less demand for BHI products.

As such, share prices of BHI would fall.

To take advantage of a potential drop in BHI shares, I’ve found some cheap put options to help us maximize our return.  The lower implied volatility on these puts makes the April $47 strike a great buy.

Trade Details:

Underlying Stock Symbol: BHI
Current Bid-Ask Price: $2.85 – $2.93
Option “Buy Up To” Price: $3.45
Break-Even On Stock At Expiration: $43.55
Maximum Risk Per Contract: $345

Exit Strategy:

BHI is trading at $49.28 per share.  Resistance levels will be at $52.50 and again at $55.  Remember, we want this stock to move lower.  Support levels will be at $47.50 and $45.  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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