[Options] Giving It Room To Dance
We like Chevron $CVX here.
Check out this breakout of a major long-term base:
In the near term, it feels like the stock might be a bit too extended to jump in now for a short-term swing trade. But that got me thinking outside the box.
On a lark, while chatting with the team earlier this morning, I decided to look at the options on the board furthest out in time. The most distant options listed for $CVX right now are January 2024 expiration LEAPS. I opened up the chain -- more out of curiosity than anything else.
I was surprised by what I found!
I noticed that the January 2024 options (716 days until expiration!) were quoting 150 calls -- a strike just a mere $15 or 11% away -- at less than $11.00 per contract! I brought this startling observation to the team and Strazza immediately blurted out: "It could move there next month!"
Yeah it could!
Now, this isn't the bet we're making. But do we think $CVX can move $20 higher at anytime over the next two years?! You bet we do. And we're putting our money where our mouths are.
Here's the Play:
We like buying the $CVX January 2024 150-strike call options for any price less than $12.00 per contract. This upfront debit is the most we can lose if we're dead wrong.
This gives us a controlling stake in future upside price action in $CVX for the next two years. In many ways, we think of this as a long-term common stock holding. And if one is willing to be creative -- one might consider selling "covered calls" against this position every month from now until January 2024 expiration to continuously lower the cost basis in the trade.
I'm not going to lay out a plan for that, but it's definitely on the table for those willing to put in the work.
But one thing we will definitely look to do is sell half of our position if/when we get a double in the value of our holdings. So, assuming a $11.00 initial purchase price, I'll leave a resting GTC limit order to sell half of my position at $22.00. If that happens -- and I hope that it does -- then I'll get to enjoy a "free ride" for the remainder of the duration until Jan 2024 expiration! (To da moon, baby!)
As far as risk management goes, we'll be keying off the $110 level. Here's what Strazza said about it: "if we're back around there then this base failed miserably and energy and crude are not doing what we thought they would be doing when we entered the trade." I'm in full agreement.
So if we see $CVX close below $110 per share at any time during our hold, that'll be our signal that we're wrong and we'll close down the trade and wait for a better setup to emerge.
JC and I will be live streaming on twitter this afternoon around 2pm ET to discuss this trade live. You can catch it live or watch the replay. Either way, find it on my twitter page.
If you have any questions on this trade, please send them here.
ASO subscribers who missed last week’s live Jam Session can catch it here.