Energy Word Alerts - My new pay service of oil and gas trade ideas
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Energy has been the surprise investment ‘goldmine’ of 2021, delivering both constructive upside for stocks, but also generational returns on dividends for many of the blue chip mega cap names, like Exxon Mobil (XOM), Shell (RDS.B) and Chevron (CVX). You want to be able to combine the two in every energy investment you make, but there’s even more of a profit opportunity available to energy investors right now. That’s the focus of this new series of articles I’m calling ‘Energy Word Alerts’.
No one wants to be a believer right now in ‘old-fashioned’ fossil fuels, not with the ever growing, loud narrative of ‘green’ technologies, prepared to sweep away these energy sources and replace them with sustainable, environmentally friendly wind, solar and other carbon neutral electric sources.
I’m not here to make a case for the inevitability of renewables, nor a case for the endless appetite the world continues to have for fossil fuels. I’m an energy trader, investing for more than 35 years in oil, gas and renewables – and I don’t spend my days worrying about where the world is going to be 20, 10 or even 5 years from now. My goals have always been the same – finding a seam in the prices for energy and energy stocks in which to find value and make money in the near term – the next 6 months to a year. I take time to care about the long-term health of the planet at night.
And there’s a heck of a seam specifically in the energy space right now that few are taking advantage of. It’s particularly opportune for retail investors, who do not have to negotiate multi-billion dollar portfolios of mega-funds or mutual funds and can move quickly and in small volume to lock in very strong returns in energy issues – particularly in energy issues – and particularly right now.
The energy markets are reflecting the high valuations and nervousness of investors who see stretched valuations in Tech stocks and other benchmarks of the indexes, with the threats of inflation, a continuing global pandemic and a possible end of stimulus money. And while much of the current stock market is undoubtedly and overwhelmingly reflecting stretched valuations, energy shares most certainly are not. That unusual disparity make energy issues some of the best medium-term investments I may have ever seen in my long trading career.
Forget about these strategies if you’re out for a quick buck. These strategies are for mature investors that are smart, know themselves and their risk tolerances, have some resources and are really keen on keeping them first, before risking them for a hopeful ‘score’. If you are looking for a fast road to riches, head for the Dogecoin, this isn’t going to be your ticket.
It involves options and mostly call selling strategies, although not exclusively call selling. The reason this is so useful right now is because energy stocks are reflecting incredibly high volatilities, which might be the nature of index leaders like tech, financial and materials stocks, but doesn’t really represent the core beta of energy shares, particularly megacaps and large independent E+P’s.
I’ve been providing these kind of energy opportunities to subscribers and am expanding to include Seeking Alpha readers with the basics to initiate these kinds of trades themselves. I am going to make a weekly post including one or two of these ideas and update on others that I’ve already provided.
Let’s take a look at some of the energy stocks I’m talking about. In fact, let’s use the three examples I gave to my subscribers and then prepared for this article just during this last week:
I’ve taken Shell as my selected mega-cap, EOG Resources as the large cap independent, and, just to keep the young risk-takers in the game, I’ve also used the speculative hydrogen company Fuel Cell (FCEL) as the third, far more risky energy investment to explore.
For Shell, the implied volatility rated near 35 when these trades were analyzed. For EOG, the IV was 45% and for FuelCell, well over 100%. All of these were measured using CBOE standardized Black-Scholes options formulas for October expiration. It should be clear that each represents very high volatility for each respective issue – rarely in my career following energy would you see a blue chip energy company like Shell reflect a 35% volatility at even the most crazy moments for oil prices.
I’ve outlined the trades as I outlined them to my subscribers on the attached sheets that can be found here:
https://drive.google.com/file/d/1wQHy88tUnU8FqxD0XaESN7omNYQ-WkGu/view?usp=sharing
All three are covered call strategies with returns based upon stocks that are not called at expiration. I’ve added the additional upside return for callable positions elsewhere on the sheets.
The basis for choosing these stocks, their specific options strikes and their expiration durations are not random. They are based on more specific analysis of each stock, the outlook over the medium term for each of them and each investors’ individual capital and risk tolerance. All of these influences can be explored by subscribing to the new service I’m starting. With better direction, you can easily customize each trade and its timing specifically for your needs. For this series, I am providing them as an illustration of just how strong – and relatively safe - energy options strategies can be for retail investors right now in spite of very high and suspicious stock index valuations – that is, if they are correctly initiated.
For each of these, as shown on the respective sheets I’ve linked, the annualized return on capital is in excess of 27%. With FuelCell, and the very high risk it entails, the return can vary between 57% and 63%. In all cases, the downside risk is with a stock that is trending lower, such as FCEL is right now. Nothing is for free, of course. Volatility, even when extended, will always describe relative risk.
In general, moreover, this strategy implies we start with a very positive view of the energy sector to be confident of the strategy, a view I have had since late in 2020 and been very well confirmed so far in 2021, with the sector up more than 35% to date. I still believe that the best returns for energy stocks have not yet been seen. If you share this long-term view, you will really appreciate this new service.
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