Over the past few weeks, the coronavirus has dominated headlines on almost every news outlet in the world – including Power Profit Trades.
It’s impossible to ignore the pneumonia-like virus that has now killed over 500 people and infected another 24,000-plus worldwide.
First, the U.S. market was largely ignoring the news while continuing a bull run to new market highs. Then, fear of the virus affecting global economic growth took the reins, crashing all three major indices to their worst days of the year.
But now, the S&P and Nasdaq are hitting all-time highs yet again, and stocks are moving higher by the minute – just as we predicted.
During the crisis, we’ve uncovered profit opportunities in the stock market. But the coronavirus is also revealing a huge cash cow within the world’s most important commodity…
And if you know how to seize the opportunity, then the money can be yours for the taking.
Here are three of the best ways to play the highest-demand commodity in the world right now…
How to Play the Highest-Demand Commodity in the World
Oil is widely considered the world’s most important commodity. Currently, it’s in the highest global demand – demand that is only expected to increase this year. At the same time, the precious commodity is a finite resource. That means that eventually, supplies will dwindle.
Supply and demand… you know how it goes. The lower the supply and higher the demand, the higher the price. But right now, that price is low. Oil has dropped 24% over the past month. Now, it’s sitting at a one-year low at just $53.85 a barrel.
All of this spells one very important word – opportunity. And here are the three best ways to cash in…
- Buy and Hold
My favorite way to trade oil is to use the Unites States Oil Fund, LP (NYSE: USO), pictured above. The USO is an exchange-traded fund (ETF) that tracks the price of West Texas Intermediate Light Sweet Crude. At this low price, the USO is at an excellent buy point, making it a great portfolio stock.
Another option is to purchase the Energy Select Sector SPDR Fund (NYSE: XLE), which is full of oil company stocks like Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX). This is not, however, a pure oil play, meaning it’s subject to company performance and news. Depending on how a company is performing, this can be either good or bad for profits.
- Buy the Strongest Oil Company Stocks
The best-performing oil company stocks will often outperform the actual commodity. Among XLE holdings, these are the strongest performers over the past month:
Apache Corp. (NYSE: APA) +7.28%
Kinder Morgan Inc. (NYSE: KMI) -1.84%
ONEOK Inc. (NYSE: OKE) -2.79%
Remember, oil has dropped 24% in price over the past month. Even though KMI and OKE are in the red, these companies have still dramatically outperformed the commodity itself. As the price of oil recovers, these companies will likely provide greater returns than a pure oil play.
Particularly impressive is APA, which has risen 7.28% over this correction in the price of oil.
- Leverage with Options
The first two opportunities here are good – but by harnessing the power of options, you could boost your returns on oil. That’s because options lower your risk, magnify your returns, and increase the probability of profit.
Here are a few ways to supercharge performance on the USO with options:
This is a longer-term play. LEAPS are “Long-Term Equity Anticipation Securities” that provide leverage and plenty of time to be right.
As I type, the USO January 15, 2021 $9.50 Calls are going for $1.95. This will cost you $195 to control 100 shares of USO at a fraction of the cost of buying the asset, which would run you $1,950 for 100 shares.
b. Shorter Term: Buy Monthly Options
With a positive stock move, shorter-term options will outperform LEAPS. But the opposite is also true. They could lose money faster if the stock drops, and are considered a more aggressive play.
But that’s exactly why we practice rules-based trading. By setting limit orders and sticking to exit strategies, we can make sure to control any potential losses – not to mention increase our wins.
If you feel oil will recover sooner rather than later, consider buying out-of-the-money (OTM) options (1-2 strikes higher than the price of the stock).
For example, the USO March 20, 2020 $11.50 Calls are going for $0.25. One contract will cost you a mere $25 to control $1050 worth of the USO until March 20, 2020.
c. Supercharge Returns: Sell Calls
This strategy works with longer-term options (60 days out or more). Similar to a covered call, you can sell 30-day calls against your longer-term calls each month, collecting monthly “rent” on your long calls.
Sell OTM calls (1-2 strikes OTM) each month to generate income that will reduce your cost basis in the stock while the USO rises.
For example, selling the USO March 2020 call for $0.25 would generate $25 a month. 12 months of “rent” would generate $300 of annual income, offsetting your call purchase significantly.
Clearly, there’s profit to be made amidst the devastating coronavirus. We’ve talked about how to protect your portfolio, rising pharmaceutical stocks, and now oil.
But there are even more profits on the horizon…
I’m talking about the chance to double your money – or more – every single day the market is open.
And not just when a crisis strikes, or volatility is high…
… but for as long as you choose.
I’ll reveal all the details right here.
Good trading,
Tom Gentile
America’s #1 Pattern Trader
