Doc Maher explains how the broader picture plays a large role in the success of your trades.
In addition to making a plan, before I take a trade I get a good sense of the overall picture surrounding my stock. This includes examining the trend and fundamentals of its sector and industry, the overall market dynamics, as well as company specific news, company fundamentals and chart technicals. As you will see in the following post, when you don't take the time to dig deeper, or if you simply ignore it, you may find yourself struggling when swimming upstream. To learn more about Long Calls, please see Play#1 in the online version of The Options Playbook located in TradeKing's Education Center.
THE PLAY - Long Call
TRADE FORMATION
Starting on July 9, NYAllstar made three purchases of NE September 65 calls (Strike A):
On July 9 at 11:23am, trader bought to open 2 NE Sept 65 calls (NE IM) for 2.50
On July 16 at 9:31am, trader bought to open 1 NE Sept 65 call (NE IM) for 2.50
On July 23 at 10:42am, trader bought to open 3 NE Sept 65 call (NE IM) for 0.85
Average cost basis of calls: 1.68 per contract
Stock range over this period: Low was 52.15 on July 23; High was 61.05 on July 14
Pending news: company to report earnings July 23 after the market closed (AMC)
Maximum gain: theoretically unlimited
Maximum loss: debit paid of 1.68 per contract per share
Break-even point at expiration: 66.68 (Strike A + debit)
ALL-STAR COMMENTARY
Noble has been trending down since a peak in mid June. (See the chart below). Let's examine this company and see if we can find any explanation.
Click here for a larger chart for NE.
According to Yahoo Finance NE provides services for the oil and gas industry. This puts in the oil services group. In fact NE is one of the ten companies that make up the ETF OIH (Oil Services Holders). Looking at OIH in the next chart should give us an idea of how that group is doing.
Click here for a larger chart for OIH.
After examining both of these charts, it looks like NE is basically just following the overall oil services group. NE dips and pops in the same places and on the same day as the rest of the group. While we can see that NE may not be performing quite as well as the ETF, the drop in July is very similar.
All this is probably tied to what's happening with oil prices so let's look at those. Below is a chart for Oil Futures for the same time period.
Click here for a larger chart for Crude Oil.
While all three are not exactly the same I think it can be seen that there is a strong correlation between them. Oil is driving oil services, and NE as part of oil services is just moving with the group. In fact NE is actually out performing many of the other members of that group. The ten companies that make up OIH are: BHI, DO, HAL, NBR, NOV, NE, SLB, SII, RIG, and WFT. If you look at all of these ten you will see a lot of the same kind of performance, some look exactly like the oil price chart.
NE reported earnings on July 23 after the market, so let's see how they did. NE reported $1.40 a share on revenue of $812.9 million. The Analysts forecast was $1.31 a share on revenue of $834.9 million. So it looks like they did OK. They beat the EPS but didn't make the revenue number. Overall it doesn't look like the kind of performance that would make the stock drop - and at first it didn't. Right when the earnings were announced NE went up in the after hours trading and again on the morning of July 24 when the market opened. However by the end of the day it closed down.
In fact all the members of OIH tend to show the same big red candle on the July 23rd followed by a similar long tail red one on July 24th. The larger market also experienced a large drop - the S&P 500 dropped almost 30 points from its previous close. So it looks like market forces are responsible for a big part of that drop.
NE has been upgraded by Jefferies & Co and the Motley Fool is recommending it. Looking at its financials, it seems to be a strong company. Longer term NE may well be move higher. In the short term it is always hard for a company to fight its sector. Right now, oil services has fallen out of favor with investors. Maybe it's fear about oil prices dropping or that these companies have already run up too much lately, I can't say. However until this changes NE will probably have a hard time moving up.
Taking in the whole picture of this trade, one can see that it is quite difficult for a stock to fight the overall trend of its sector or the mood of the broader market, even if there is a fair amount of company specific news that is positive. This points out the importance of not just analyzing the stock you are interested in, but also its sector and the larger market forces that be. I hope this helps in future trading.
"Income Trader"
Doc's previous posts: Managing Your Swing Trade and Moving Your Stop and Taking Profits
For a list of previous All-Star Trades, please click here.
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Nicole Wachs contributed to this post.
Options involve risk and are not suitable for all investors.
Please read Characteristics and Risks of Standardized Options.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Community, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Jonathan F. Maher, PhD has a professional business relationship with TradeKing.
