Options Trader: Tuesday Morning Ideas

by: Philip Davis

Oh dear! I hope it wasn't something I said...

OK, so I was a little ahead of the game in August when I wrote " Oil's Slippery Slope: Why Crude and Oil Stocks May Be Headed Down, Fast" and I was way ahead of the curve in September with " How Long Can the Exxon Bulls Last?" But we learned from our (my) mistakes and figured out how the markets were being manipulated and positioned ourselves accordingly.

I even tried to help OPEC out (and when I say OPEC I include ExxonMobil Corp. (NYSE:XOM), Chevron Corp. (NYSE:CVX), BP PLC (NYSE:BP), Royal Dutch Shell (NYSE:RDS.A), Total S.A. (NYSE:TOT) and all the other enablers) by pointing out the flaw in their pricing model and suggesting an alternate strategy. Too bad they didn't listen -- people pay me good money to consult, and I gave them that for free!

I will be jetting off to Stockholm later this year to accept the Nobel for my Roach Motel Theory, which is now playing out in full and painful force across the energy patch, and this time I hit it right on the head on December 15th when I wrote:ExxonMobil: Black Magic.

Timing may be everything -- but persistence and sound fundamentals are certainly something too!

The Hang Seng broke below 20,000 but the Nikkei (oil dependent) rose 146 points and the rest of Asia did well too as the mainland market made a new record on the China Life IPO (for their market).

Europe is trading fairly flat for the same reason we might -- the energy sector is taking a beating and a half today! Our man Putin probably poked the hole in the bubble by committing the cardinal sin of oil fear-mongering -- he actually carried out a threat! Russia cut off 1.5Mbd to Europe over a very silly dispute with Belarus that should have been handled in court (like big boys do).

The net effect of this was that it made European traders realize they had so much oil on hand that losing 1.5M barrels of it per day (12% of Europe's consumption) really wasn't a big deal. Poof! No more worries about what will happen if Russia stops supplying oil -- it happened, it's over -- we lived...

Now, more than ever, we need that Nasdaq and Russell leadership to pull the markets away from the drag of the energy sector as the sell-off is coming faster and farther than I had hoped, but there is no denying that what constitutes a crisis for 20% of the S&P will be a bonanza for the other 80%!

As I said yesterday: It's party time!

I'm not even going to worry about levels today as up is good and down is bad and it's doubtful we're going to have a major breakout today. Watching the indices will only distract us from what's really important and that's watching our 26 open oil puts!

I also said in yesterday morning's post:

"Oil is getting as pushed as it can be and the dollar is weakening in response to China's tightening and Europe's anticipated strength this week. We're looking to see if $57.21 holds to the upside. I think I'll be pleased with my XOM Apr $80 covers for today, but inventories are shaping up to be a disaster for oil bulls this week. See Zman's excellent wrap-up on last week's crude data. A responsible analyst would calculate the next upside target for crude so he'd be able to point to it later and say he did cover all the bases but I will tell you right now that there is no upside for crude right now and any upward movement today is engineered nonsense."

Yep, that was about right (pat, pat).

Last Friday I said: "Let's keep an eye on our oil resistance levels of $57.21, $55.66 and $54.34" and now it seems we have to keep another eye on $52.88 on the way to a possible test of the $50 mark!

Gold blah blah, dollar blah blah...

OK -- back to oil!

Oil 09 01 2007

We take the money and run on the initial sell-off of all January puts and roll into smaller positions in February with no more than half our profits with stops at 50% losses to preserve 75% of our profits. There WILL be a bounce -- that's when we'll position for more downside. But for now let's count our blessings that we were in the right place at the right time!

We should have lot's and lots of fun today!

- Phil

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