In our last issue we discussed the idea of “renting” a stock for the purpose of maximizing gains… and minimizing risks.
As promised, today we’re going to go through a case study that was published a few weeks ago and talk (okay, we’re going to brag… and you’ll see why soon) about its outcome.
It’s a play on renting a stock for the short term… and cashing in for the long term.
Let’s get started…
With the recent run up in oil prices, I believe now is a great time to show you a case study on one of my favorite stocks in the industry.
Oneok Partners LP (NYSE:OKS) is an oil stock that’s engaged in the the gathering, processing, storage, and transportation of natural gas in the U.S. When I first approached this trade idea in March, my charts were showing that OKS was languishing just a bit, and was trading well below its 50-day Simple Moving Average (SMA).
As part of the strategy to take advantage of OKS’s position, I used my “Darknet Signal” to spot a buying opportunity. Darknet is my proprietary tool for looking at undervalued companies that have pulled back and are ready to explode upwards.
Typically these types of signals are good for about 30 days. Look at the chart below and you can see that this upside target price coincided with the 50-day SMA.
All OKS had to do was test that moving average and a double would be possible.
Should it move as our proprietary tools showed it could, a double on a low-priced option with a move required from the stock could be in order.
Remember, I like stocks that offer a double.
Now in order for this stock to double, I was looking at an $80 price target. That would mean oil would need to get to $100 a barrel in 30 days… which was NOT GOING TO HAPPEN.
But a carefully chosen option could do it on a small stock move…
Remember when I talked about calls, and how they are cheaper than stocks? To own 100 shares of OKS at that time you would’ve needed about $4,000, plus commissions.
The call options you see below allowed me to “rent” the stock for $110 (1.10 x 100 shares). That’s less than 3% of the cost of ownership! And by the way, I only planned on renting this stock for a maximum of 30 days.
Let’s Talk Risk vs. Reward…
What’s the total risk on this trade? Well in the case study above, it’s $110, plus commissions. That means the worst that could happen is OKS drops, and I am out $110 per contract.
Let’s imagine for a moment that OKS dropped in half over the next 30 days. A stock trader buying 100 shares at $40 would see a loss of $2,000, while the “RENTER” would lose no more than $110.
Meanwhile, the reward on buying a call option is unlimited until its expiration. Unlimited is a vague term, so let’s put it in the perspective of this trade.
My “Percent to Double” tool tells me that I only need a 6.84% move on OKS to theoretically double my option value.
Looking at the risk graph below, the target price it shows the stock needs to hit is $42.15.
Should OKS reach its target price on any of the earlier time intervals, the profitability will be a bit better than a double:
- If it happens on the red line, basically right away the profit shows +$158.
- Should it take until the blue line, or 19 days before expiration, the profit shows +$140.
- If it takes until the green risk graph line, or 10 days before expiration, profitability shows +$120.
Any of these would be just fine by me.
So just how did “Renting OKS” turn out?
Within three weeks OKS moved up to our target, and these options did double in value. So we saw a 100% return on renting this stock in a matter of weeks!
All with lower cost, lower risk, and a small movement on the underlying stock.
As a bonus this week, I’m going to send a video on Saturday to explain it all, as well as instructions on how you would place this order in real time.
America’s #1 Trader