EOT Trade Alert – January 7, 2011

| January 7, 2011

January 7, 2011

Trade Alert:

   Buy DO June 2011 $79.25 Calls at $2.75 or better

Company Background:

Diamond Offshore Drilling (DO) is an offshore oil and gas drilling contractor.  They specialize in deep water, harsh environment, and conventional semisubmersible and jack-up markets.

Short-Term Catalyst:

Oil prices have been screaming higher lately.  The price for a barrel of oil recently topped $90 for the first time since October of 2008.

As oil prices move higher, M&A activity in the Oil and Gas industry is picking up steam. Over the last few months, the M&A activity is telling.  Many of the major players are buying up companies who specialize in hard to get oil.

They know the days of finding huge new deposits of easy to get oil are a thing of the past.

Simply put, the new oil fields are being found miles below the ocean’s surface and in extremely harsh environments.  This puts a premium on the services DO offers.

Despite this emerging trend, many of the offshore drilling stocks haven’t recovered from the selloff in the wake of the BP oil spill in the Gulf of Mexico.

Right now DO looks extremely cheap.  It currently has a PE of around 10, well below its historical median PE.

But with oil prices surging, major oil and gas companies are racing to bring new supply online.  That means many new deep water and harsh environment oil wells will be drilled in 2011.

As a result, I think we’ll see DO’s stock soar this year.

And to top it off, DO’s chart looks great too…

DO broke through resistance of the 200-day moving average today.  This level has been a “brick wall”.  It’s stopped DO cold in its tracks the last three times it reached this level.

Now it’s finally broken through.  This is a very bullish setup.  It usually leads to much higher prices in short order.

This looks like a great buying opportunity to me.  The stock is cheap, the industry is red hot, and the chart looks great.  Let’s grab these options on DO now!

You might notice the odd strike price ($79.25).  Most of the time strike prices are nice round numbers.  But since DO issued a special dividend last year, it caused the $80 strike price to be reduced by 75 cents.

Trade Details:

Underlying Stock Symbol: DO
Current Bid-Ask Price: $2.50 – $2.57
Option “Buy Up To” Price: $2.75
Break-Even On Stock At Expiration: $82.00
Maximum Risk Per Contract: $275

Exit Strategy:

DO is trading at $69.76 per share.  Resistance levels will be at $80 and again at $85. Remember, we want this stock to move higher.  Support levels will be at $64 and $62. 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

About the Author ()

Comments are closed.