This Trade Targets a 90%-Plus Potential Return by March

Editor’s note: In this new weekly column, Rick Pendergraft shares one of his favorite option trades for the current market. Each trade offers defined risk and typically targets 100%-plus potential returns. Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis.

Option Trade Of The Week: Apache Corp. (NYSE: APA)

Energy and oil service stocks have been rallying over the last few months, but the gains within the groups have varied quite a bit.

Exploration and production companies, as well as oil equipment companies, have performed better on average than the pipeline companies.

The sentiment toward the entire energy sector has gotten overly optimistic in recent weeks and I wouldn’t be surprised to see oil prices slip a little in the coming month.

That being said, I was scrolling through the charts from my bearish scan last night when I took note of the chart for Apache, an oil and gas exploration company.

What I noticed was the trend channel that has dictated trading over the last nine months and how the stock is hitting the upper rail.

We also see that the daily stochastic readings for APA are in overbought territory.

I also looked at the overall sentiment toward Apache and what I saw was that on December 21, the sentiment reading was in the top five percentile readings for the past year, meaning extreme optimism toward the stock. Historically high or optimistic extremes in sentiment have marked tops for the stock.

Buy to open, the Feb18, 47.50 strike puts on APA. These options expire on February 16. Based on previous declines and the previous instances where the sentiment readings were high, this should be sufficient time for a dip in the stock and the dip should range between 12% and 20%.

The option closed with an ask price of $4.50 on Tuesday and you should be able to get in to the trade at $4.70 or less. A decline to $38.50 would make this option worth at least $9.00 (for a potential 90%-plus return) based on the intrinsic value. So your target should be for the stock to reach $38.50 and I would recommend a stop-loss point at $46.25.

— Rick Pendergraft

OPTIONS DISCLAIMER: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, investorservices@theocc.com.

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Rick Pendergraft, Trades Of The Day

Rick Pendergraft has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick's analysis process includes fundamental, sentiment and technical analysis.