There are a few well written articles on Chevron (CVX) that do a wonderful evaluation for it as a long term trade with great dividend potential in the future. Two I particularly like are by Dividend Monk and another by K202. CHX has its challenges including litigation in South America and a possible pullback in the oil market as a whole. In this article we are going to focus on a shorter term money making strategy using options.
Chevron Corporation, through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. The Upstream segment involves in the exploration, development, and production of crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and transportation, storage, and marketing of natural gas, as well as holds interest in a gas-to-liquids project. 
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Why a Short Term Options Strategy?
With litigation, possible changing oil prices, and expectations of a market correction, we would like to focus on a short term trade for those who enjoy trading options. Analysts have CVX pegged at 138 on the high side which gives it plenty of upside left. If we look at a long term chart, we can see a very well defined Ascending Triangular Pattern.
These are very reliable continuation patterns. It is well formed and has the ability to break out, possibly by spring. But we have more movement that we need before we make this play. We want CVX to move to the lower trend line. This being the case, we are going to wait for a pullback in the stock to possibly the 89-101 levels.
The Options Strategy
Investing now, we are looking at a Bear Put Spread. This is a vertical spread strategy creating a debit immediately. Bringing down the cost and risk instead of just buying a plain put option is why this strategy is so popular. Here are the steps we take:
- Sell a lower strike price put option
- Buy a higher strike price put option with the same expiration
Presently we would buy 100 March 2012 put option (presently priced at $1.36), then sell a 97.5 put option of the same expiration (presently selling for $.93). So we have a reduced rate and our debit is $.43 for this trade. The logic behind this trade watching CVX fulfill its pattern before it continues up.
- Net Debit: [Premium bought - Premium sold] ($1.36 - $.93)= $.43
- Maximum Risk: [Net debit paid] $.43
- Maximum Reward: [Difference in strikes - net debit] (1.00 - .43)= $.57
- Max ROI: 132.5%
For us to reach this maximum reward we would expect CVX to fall to the 97.5 level. This is well within the lower trendline. As with all trades, research first. This trade works based upon the assumption that CVX will correct short term-sometime over the next 10 weeks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
