EOT Trade Alert – November 18, 2008
November 18, 2008
Trade Alert:
Buy SU January 2009 $17.50 PUTS at $3.00 or better (SXHMW)
Company Background:
Suncor Energy (SU) operates as an integrated energy company in Canada. The company’s business is divided into four segments: Oil Sands, Natural Gas, Energy Marketing, and Refining.
Short-Term Catalyst:
Oil prices are in a freefall. We called it in early September when we recommended buying Puts on Chevron (CVX). The CVX puts ended up with a peak gain of 764%. We did it again a few weeks ago with BP (BP) puts which showed peak gains of 42%.
Well the trend in oil’s going to continue for some time.
How do I know? Two things are pointing to lower oil prices. First supply… recently OPEC met and decided to cut supply in the hopes it would stabilize prices. That didn’t happen – oil continued to fall. They cut 1.5 million barrels of production a day, it should have had a direct impact, but it didn’t.
That tells me supply is flooding the market and everyone is looking to demand.
The second indicator is demand. Recent statistics are showing despite gasoline prices falling, Americans are driving less. In the state of Arizona, statistics show gas consumption was down 6% when compared to the same time last year.
I’m sure it’s the same all over.
What’s driving lower demand? Recession. People are looking for ways to cut back on expenses and driving is a simple way. Also when economic times get tough, consumption slows… that’s what we’re seeing now.
With prices falling, the value of oil producing companies will also fall. Suncor is at even greater risk because it’s producing oil from the oil sands – a very expensive way to extract oil. The company might hit a point where oil prices are lower than the cost of production.
Suncor’s financials are going to get hammered over the next few months as their profits get squeezed. This sets their stock up for a big fall.
On a technical basis, the company’s stock is trading well below its 50-day moving average. The stock’s also had a short-term moving average crossover to the downside. All of this points to a much lower share price.
Trade Details:
| Option Ticker Symbol: | SXHMW |
| Underlying Stock Symbol: | SU |
| Current Bid-Ask Price: | $2.30 – $2.45 |
| Option “Buy Up To” Price: | $3.00 |
| Break-Even On Stock At Expiration: | $14.50 |
| Maximum Risk Per Contract: | $300 |
Exit Strategy:
SU is trading at $19.11 a share. Resistance levels will be at $23 and again at $25.50. Remember we want the stock to move lower. Support levels will be at $17 and again at $15.
Chart:
Category: EOT Trade Alert
