Option Trade Of The Day: Kinder Morgan (NYSE: KMI)
Energy and oil service stocks have been rallying over the last few months, but the gains within the groups have varied quite a bit.[hana-code-insert name=’adsense-article’ /]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 weeks.
That being said, I was scrolling through the charts from my bearish scan last night when I took note of the chart for Kinder Morgan, an oil and gas pipeline company.
I took note that the stock has been moving lower over the past year and had formed a trend channel and was near the top of the channel.
We see from the 10-day RSI and the daily stochastic readings that KMI is in overbought territory on both indicators and reversed a liitle on Friday. I look for that reversal to continue and for the stock to drop below the recent low in the $16.75 area.
I also looked at the overall sentiment toward Kinder Morgan and what I saw was that on January 2, the sentiment reading hit the second highest reading 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 Mar18, 20 strike puts on KMI. These options expire on March 16. Based on previous declines, that should be sufficient time for a dip in the stock. The stock closed at $18.86 yesterday and based on the previous downward cycles, I expect a decline of at least 12.5% which would take the stock down to the $16.60 level and would make this option worth $3.40 on an intrinsic basis. The asking price on the option was $1.59 at the close yesterday and I would recommend entering at $1.70 or lower. This would mean a double for this option.
— Rick Pendergraft
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