OXY Stock Is At A Crossroad; Why This Calendar Spread Could Make $330

Occidental Petroleum (OXY) looks like it might be resuming its long-term uptrend. So, OXY stock could also head its way toward a test of an all-time high around 74.

X

One way to get long OXY stock while risking less capital is by using options. This strategy also takes advantage of the current volatility structure with short-term options having higher volatility than longer-term options.

We’re going to look at a bullish calendar spread. This trade involves selling a short-term option and buying a longer-term option with the same strike price.

OXY Stock: How To Play A Rebound

According to IBD Stock Checkup, OXY stock ranks 1st in its group and has a Composite Rating of 99, an EPS Rating of 76 and a Relative Strength Rating of 99.

Traders with a price target of 75 could place the bullish calendar spread at that price. Selling the Aug. 19-expiring, 75-strike call option will generate around $80 in premium. And buying the Sept. 16-expiration 75-strike call will cost around $170.

That results in a net cost for the trade of $90 per spread. The beauty of this option trade in OXY stock? You know that’s the most the trade can lose. The estimated maximum profit is around $330, but that can vary depending on changes in implied volatility. 

The idea with the trade: If OXY stock trades up to around 75, the calendar spread will increase, resulting in a net profit.

View a bullish calendar spread as a good way to gain some upside exposure on a stock without risking too much if the move doesn’t fulfill expectations.

Where To Set A Profit Target In This Call Spread

In an ideal scenario for this trade, OXY stock rises to 75 around Aug. 19 with little change (or a rise) in implied volatility. The combined position has a net delta of 8, which means the trade is roughly equivalent to owning 8 shares of OXY stock, although this will change as the trade progresses.

For a trade such as this, I would set a profit target of around 150% and a stop loss of 20%.

Please remember that options are risky, and investors can lose 100% of their investment. 

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ

YOU MIGHT ALSO LIKE:

With Apple Earnings Around The Corner, Here’s How To Play The Upside Without Risking Too Much

How To Use Options To Buy KO Stock For A Discount

UNH Stock Today: Why A UnitedHealth Bull Call Spread May Generate A $655 Profit

Short Straddle Using Goldman Sachs Stock Could Generate $1,615 In Option Premium