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Get Ready for $75 Oil

With oil stocks dropping in price as quickly as they have, be careful not to fall for "dividend traps." Payout ratios up to 50% to 60% are acceptable as long as revenue and margins are stable. As oil prices continue to drop, and I believe they will, margins will get squeezed along with profits. Earnings misses and dividend reductions are two of the surest ways to move a stock price lower.

Large yields also typically results in lower cost for portfolio protection with options. If you're not ready to sell your shares, look toward buying puts and or selling calls against shares to help mitigate risk.

Expect retests of the 200-day moving average of the XLE ETF near $61, Exxon near $74 and Marathon near $18. USO and Conoco are already trading below the 200-day moving average.

Author does not hold a position in any stock mentioned.
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