This Trade Targets a 185% Return by June

Option Trade of the Day: Anadarko Petroleum (APC)

Yesterday was another rough day for stocks with the Dow suffering its second 1000-point drop of the week. While the selling has been widespread and few stocks have escaped without some sort of decline, most of the best companies, at least from a fundamental standpoint, have dropped, but many of them are still above key support levels.

[hana-code-insert name=’adsense-article’ /]Even the indices are still all above their 52-week moving averages with the Russell 2000 being the one that is closest to the trendline.

It could be seen as a transitional period, but it is hard to bet on solid, sound companies going down while their upward trends are still in place.

The daily oscillators are oversold while the weekly oscillators aren’t even past the midway point in many cases.

These facts have made it difficult to find bearish opportunities in recent days, but I feel the downdraft could continue for a little while longer and would like to offer more bearish trade ideas. As such, I went through a bunch of different charts last night and took a slightly different approach and sought companies with the weakest fundamentals and then looked at their charts.

What I came up with was an oil stock that has not dropped tremendously in the past few days, but is in a long-term downtrend. The company is Anadarko Petroleum (NYSE: APC). The company scores a D in its Investor’s Business Daily SMR Rating due to a decline in sales over the last three years and a negative profit margin. The company has also struggled to grow earnings over the last three years.

We see on the chart that the stock briefly moved above the trendline that connects the highs from the last three years and has since dropped back below the trendline. The weekly oscillators are still pretty high with the stochastic readings still in overbought territory. I look for the stock to drop over the coming months and could possibly challenge the low from last summer down in the $40 area.

Buy to open the May18 60-strike puts on APC at $7.00 or better. These options expire on May 18. With the increase in volatility and the wild swings we have seen this week, I wanted to go out to May to buy more time and protect the downside a little better as the time decay of these options won’t be as great as the front few months. While I believe the stock could drop to $40, which would make these options worth $20 and would create a gain of 185%, we only need the stock to drop down to $47 for the options to double. I would use the recent high of the $62.50 area as a stop-loss point for this trade.

— Rick Pendergraft

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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.