Oil has been on a steady climb and still has room to go to get back to its most recent high. OIH, an oil ETF, topped 240 back in June and looks to head that direction again. So what is the best way to take advantage of this strong trend?
Trades boil down to risk and return. If we were to buy 100 shares of OIH it would cost $22,500. If it goes all the way back up to the recent high of 240 we would make $1,500 or 6.6%. Not a bad return. While the risk of OIH going to zero is unlikely, it is possible. There was a point a year ago where oil futures traded at negative prices. Worst case scenario we could lose the $22,500.
When we start to look at how to control that risk, options become a very good candidate to use in this situation. If we look at a call option with a strike of 240 (using the previous high as a target) and an expiration of Nov 19, they are at $5.41 this morning. To buy a contract for that same 100 shares of OIH, we would pay $541. That definitely gets us in the trade with a lot less of our hard earned capital on the table. With less money to get in the trade that means we have less risk as well. If the option expires worthless, our downside is $541, or $22k less than buying the stock outright.
The other advantage is that we have the potential to get a better return. If that stock moves toward the target price we could potentially see the value of our option double. If it goes beyond that, we could gain even more.
We will keep an eye on how this strategy plays out over the next few weeks and keep you updated.
If you are interested in getting more info on how to use options for trading advantages like we just discussed, be sure to grab Wendy Kirkland’s How To Trade Options. You can get a free copy here.
Keep learning and trade wisely,
Market Wealth Daily