Trading an Oil Related Stock Option Before The Summer Driving Season

Oil-Related Stock Option

Contemplating on buying an oil-related stock in the months leading to the June Summer's driving season?

Is it a wise choice?

Well, demand for gasoline tend to increase gradually towards the summer month ie. June where people in North America would take a week-long road trip driving across the country. Demand is high that in year 2007, the gasoline pump hit US$3.00 per gallon in some of the states across the US.

Some time back I have come across a software which could chart the 10-Year stock price trend of oil-related companies involved in oil refinery like Valero Energy Corp (VLO), Exxon Mobil Corp (XOM), BP plc (BP), Conoco Philips (COP). On a 10-year average basis, the share prices of these companies' would normally move up gradually between the March to May period. This somehow coincides with the rising demand of gasoline towards the month of June, the annual summer driving season.

Valero Energy Corp (VLO) Stock Trend

So how can you trade a stock option to take advantage of the potential rise in the share price of the oil related companies stocks in the March to May period mentioned above?

Exxon Mobil Corp (XOM) Stock Trend

By the way, a stock option is a derivative trading instrument which gives you the leverage and the right to buy or sell an underlying stock at a fraction of the cost of trading the underlying stock. However, do remember that options have expiration dates. You would have to sell the option for a profit (if available) when the option premium have gained value as the share price of the underlying stock moved in the anticipated direction. If the stock option is not sold for a profit or when the option premium still contain some value during the life-span of the stock option, the option would lose all its value by expire date, unless it has gone in-the-money.

Since the share price of oil-related companies could probably go up between March to May, you could trade a straight call position or a bullish credit spread (eg. bull put spread) sometime in March once you see the share price started moving up. You could choose a stock option expiring sometime in June or or better, expiring later than June. The advantage in choosing a further month option would be to prevent the option premium from eroding faster than nearer month option due to the option time decaying factor.

BP plc (BP) Stock Trend

It would be advisable to trade at least an in-the-money (ITM) stock option which has an option delta near to 1.0 (range is from 0.0 to 1.0) so that the stock option would mimic the point-to-point movement of the actual underlying stock. You should avoid buying far out-the-money (OTM) option in such a situation since we would not be expecting turbulent changes in the stock prices of such oil stocks, unless there's a drastic disruption in the demand/supply of oil due to political unrest (eg. in the middle east) or other reasons.

Conoco Philips (COP) Stock Trend

Since there are no sure-win trade in the trading world, you should set a stop loss the moment you initiate your trade so as to protect the amount of capital that you have invested in the trade. The stop loss should be set to the underlying stock price instead of the option price since option price movement tend to be more volatile compared to stock price movement. This is to avoid the trade being stopped out too quickly without giving enough time for the underlying oil stock to make its anticipated price movement. As the oil stock start moving up in the anticipated direction, you could choose to close the option position once you reached a particular profit target or you could set a trailing stop to the profitable position so as to squeeze out more gains from the option position.

So, do monitor the share price movement of the oil-related stocks in the months of March to May leading to June Summer's driving season.

Disclaimer : The stocks mentioned above are for your reference and not my stock recommendations. You are advised to perform your own due diligence to guide your own trading decision.

Yours sincerely

Tony Chai

About Me

Tony Chai has been trading stock options, particularly US stock options, since he graduated from Live Freely Options Trading Seminar in year 2004. His stock options trading technique involves mainly trading options based on earnings gapping analysis. In his stock options trading web-site, you'll find a number of informative articles written by himself and seasoned options traders to sharpen your stock options trading skills. Tony also record his stock options trades and his analysis for initiating those options trades in his stock options trading blog.

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