Option Trade of the Day: Suncor Energy (NYSE: SU)
Last night’s scans showed 34 bullish signals and only three bearish signals. While under normal circumstances, this wouldn’t be all that noteworthy, but when I entered those results into my spreadsheet that calculates my market barometer, I got the first positive reading I have had since December 12.[hana-code-insert name=’adsense-article’ /]That is an unusually long time for the barometer to be in negative territory, so I like the chances of a rally in the coming week to 10 days.
As you can imagine with the skew of bullish signals, there wasn’t much for me to look at on the bearish side, so it shouldn’t be a big surprise that today’s trade idea is a bullish one.
The stock is one I have recommended options on before in a service I used to run.
Suncor Energy (NYSE: SU) is an integrated energy company based in Calgary, Alberta, Canada.
I have been trading options off and on since 1990.
One of the things I have learned over those 27 years is that sometimes you have a good feel for how a stock moves and in the case of SU, I can say that I have been in synch with the stock pretty well over the last year. The stock has been in a trend channel and I recommended the calls on three different occasions during this cycle- in late August, in late October and again in mid-December. The first two worked out and we got spooked out of the third one.
When I saw the stock on the bullish list last night and then looked at the chart, I was excited. But my excitement was squelched a little when I looked and saw that the company is reporting earnings next Wednesday. That piece of information almost kept me from writing about Suncor because I am not a fan of trading options on a stock that is getting ready to make an earnings announcement. It seems like it is too much of a coin-flip most of the time, plus traders tend to bid up the price of the options ahead of the earnings reports. Despite all of this, I am suggesting calls on SU ahead of earnings for today’s option trade idea.
Buy to open the March18 35 strike calls on SU at $2.00 or better. These options expire on March 16. Because of the earnings announcement next week, this is a riskier trade than usual. If the company misses on its earnings expectations, the stock could drop sharply and this could be a total loss. But because of the previous success I have had with this stock, I think the stock rallies once again and heads back up to the $39 area and possibly even higher. I would make one suggestion with regard to this trade idea and that is to reduce your allocation because of the risk level. If you normally put $2,000 into a trade idea, cut it in half and put $1,000 into this one.
This is only an example and should not be construed as advice on how much to put into the trade. I am just suggesting that you should cut your exposure to this one trade. That being said, with the stock closing at $36.35 yesterday, these options are approximately 70% intrinsic value and 30% time premium. A rally to $39 by the stock would create a 100% gain on these options. If the company were to report earnings that blow estimates out of the water, the stock could rally well beyond the $39 level.
— 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, firstname.lastname@example.org.[hana-code-insert name=’wyatt-article’ /]