EOT Trade Alert – September 4, 2008
September 4, 2008
Trade Alert:
Buy CVX December 2008 $75 PUTS at $2.80 or better (CVXXO)
Company Background:
Chevron operates as a global energy company worldwide. They focus on the exploration, development, production, refining, marketing, and transportation of crude oil and natural gas.
Short-Term Catalyst:
In the last 48hrs we’ve learned something very important about Oil.
The Sellers are firmly in control of the market.
How do we know this? We have Hurricane Gustav to thank.
Friday, before the long Labor Day weekend, oil traded for more than $115 a barrel. Gustav hit the coastline and the destruction was minimal (to the oil production infrastructure anyway).
That area accounts for more than 25% of petroleum production and 40% of refining. And on Wednesday about 96% of oil production was shut down. Turned Off. Not working. Oil companies were assessing damage (none reported major damage) and rushing workers back to the oil platforms.
With 96% of production off line, oil should have rallied . . . instead the price fell.
It fell more than $5 on Tuesday, and it was down again on Wednesday.
This tells us despite big news that should have pushed crude prices higher, selling was rampant.
Adding to the selling is the strengthening US Dollar. As the Dollar climbs in value against other world currencies, it makes the price of oil more expensive. Add that impact to already high oil prices and you have a reason for oil demand to fall. With demand falling, oil prices are sure to follow suit.
This doesn’t bode well for the biggest oil producers like Exxon Mobile, British Petroleum, Chevron, or ConocoPhillips. I looked at all of these companies and I discovered some unique things about Chevron.
In the last quarter their institutional holdings have fallen by more than 12%. That means the smart money is getting out. Also, their stock is trading below the 200 day moving average, and a big moving average crossover just occurred to the downside.
Chevron will trade along with the price of oil and I’d expect that to continue downward for the next few months. Remember September and October have historically been bad months for the market.
This gives us some good fundamental and technical reasons why CVX is heading lower.
Trade Details:
| Option Ticker Symbol: | CVXXO |
| Underlying Stock Symbol: | CVX |
| Current Bid-Ask Price: | $2.35 – $2.50 |
| Option “Buy Up To” Price: | $2.80 |
| Break-Even On Stock At Expiration: | $72.20 |
| Maximum Risk Per Contract: | $280 |
Exit Strategy:
CVX is trading at $82 a share. Remember we want the stock to fall in value. Support levels will be at $76.50 and again at $71. If the stock moves higher it will reach resistance around $88.50 and again at $92.50.
Chart:
Category: EOT Trade Alert
