Oil's Next Move

I’ve written a lot about oil over the last few years.

The shale revolution has been a key factor in America’s economic recovery since the financial crisis. It’s boosted employment in the oil patch, single-handedly cut our trade deficit in half, and helped drive a resurgence in manufacturing. 

Perhaps best of all, individual investors have made a lot of money on U.S. oil stocks over the last six years. 

Obviously, the conversation has changed over the last six months, as oil prices have crashed. Falling earnings from the energy sector helped spark a 6% correction for the S&P 500 in January. Spending cutbacks from oil companies are starting to cost people their jobs. 

And worst of all, some individual investors have seen the value of their oil stocks plummet.

It is an important topic. So let’s get into today’s message about how individual investors like you can quickly and easily recoup some value with a little review…

On December 10, 2014, I wrote that Bakken darling Oasis Petroleum had fallen from $58 to $12 a share and that a buying opportunity was coming soon.

Then, on December 15, 2014, I told you we were likely seeing the bottom for oil stocks after Talisman Energy was bought out for a 30% gain. I even offered a few more buyout candidates, including the aforementioned Oasis Petroleum and another attractive company called Laredo Petroleum (NYSE: LPI). 

Laredo was trading at $7.39 a share that day. A week later, it hit $11 — a 48% gain in six days. 

The same thing happened to Oasis. It ran from $12.25 on December 15 to $17.70 in six days — a very sweet 44% move. 

The stocks pulled back, as stocks will do. But those early December low prices for Oasis and Laredo have not been seen again.

Did I Call the Bottom for Oil Stocks?

Yes, I did call at least a short-term bottom for oil stocks.

But I’ll also be the first to admit I got lucky.

I wasn’t trying to perfectly time the bottom for oil stocks. I was simply alerting you — the Wealth Daily reader — to what looked like a good profit opportunity. 

In other words, I was just doing my job. 

Now, I’ve been doing this a long time — nearly 20 years, in fact. I learned the ropes from some very smart, very successful investors. It seems a little of their invaluable tutelage rubbed off…

There are signs you can look for that show a stock’s decline is slowing down and that the price is starting to look attractive. And if you are patiently looking for opportunity, you might be surprised at how often you get lucky…

In the case of Oasis and Laredo, the signal was when Spain’s Repsol bought out Canada’s Talisman Energy. It’s a fairly easy call to make: When one oil company sees value in another oil company, it’s a good bet that other oil stocks will rally…

But call a bottom for oil stocks? That’s a fool’s errand. And if I start claiming that I have a supernatural power to perfectly time markets and stocks, then you can be sure: I am a fool. 

Now, back to my job (helping you make money). I want to share a particular strategy with you that can help boost your total profits by 25% or more over the course of a year. In fact, I advised some readers to use it last week, and it turned a 17% profit into a 31% profit. 

Here’s how it works…

Anatomy of a 31% Profit

Last Monday was the first trading day of February. And the first day of a month can often be a bullish day, as mutual fund guys have new money to deploy.

Now, after the nasty January we had, this first day of February was setting up to be particularly bullish. 

The S&P 500 had fallen to 1,995, and if you check the chart, you’ll see it has had a tendency to bounce in that area. In fact, it had done so four or five times in the last three months. The fact that it was hitting that support level at the same time the calendar was rolling over to a new month made a rally a high probability event. 

In addition, oil prices had been steady around $45 for a couple weeks. It seemed clear to me that it was time to buy an oil stock…

And so, first thing on Monday, February 2, I advised a group of my subscribers to buy some Oasis Petroleum. We got the stock around $14 early in the day. By the close that day, it was over $15.

The next day, Tuesday, February 3, the stock jumped over $16. We were up 15% in about 24 hours — not bad at all.

But that’s when we did something a little unusual…

Most investors would probably consider selling the stock and taking that 15% right then and there. Instead, we decided to take 10% of our purchase price in cash — right then and there.

How?

We simply agreed to sell our shares at $17 apiece — and we were paid 10% of the purchase price in cash. That cash appeared in each subscriber’s brokerage account right away.

And if you’re reading carefully, you’ll notice that the price at which we agreed to sell our shares was higher than where the price was when we entered the agreement!

At $17, we would be up 21% on the stock. Plus, we’d have the 10% in cash — for a nice total gain of 31%.

Selling the Right to Buy

Most investors don’t realize they can be paid for simply agreeing to sell stock they already own — and at a higher price than they paid, too.

But some investors do this all the time — by selling covered call options. We just used this strategy to turn a 21% gain into a 31% gain!

Now, when you sell a covered call option, you are selling the right to buy stock you already own. You get paid cash right away, and even better, you can agree to sell your stock at a higher price than what you paid!

Covered calls are no more risky than owning stock. In fact, because you can use them to create a revenue stream, they are actually less risky than simple stock ownership.

Still, many individual investors can’t see past the risk of buying options, and so they miss out on this great source of income.

Research firm Value Line even says this strategy is “ideal for retirement accounts such as IRAs, since [it] offer[s] income and protection.” (Yes, the SEC has said covered calls are safe enough for retirement accounts.)

For starters, when you sell a covered call, you keep that money. The call option is said to be a “covered” call because the obligation implicit in the call option contract is “covered” by the stock you own.

If the stock rallies past the price at which you agreed to sell, you keep the money from the covered call plus the profit from the stock. If the stock moves sideways, you keep the covered call money and the stock. And you are free to sell another call, taking in more money.

If the stock moves down — which is always a risk in the stock market — you have the cash from the covered call sale to offset the stock price decline. Here again, though, you still have the stock and will be free to sell another call, take in more cash, and further offset any losses.

There are no limits to how many times you can do this.

There aren’t many win-win situations in the stock market. Covered call trading may be the closest thing to it.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.