OXY: Reader's Choice

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One of our Options Profits readers requested a play in Occidental Petroleum (OXY) in the April 16 Weekly Chat Forum. Jill creates a new forum each Monday morning by 7am ET and it is the perfect place to share ideas and ask us for trade specific content. Pay attention for the email alerts each Monday and you can also find the forum via searching Jill's name in the box at the upper right or by clicking on the events tab.

OXY will report Q1 earnings on Thursday. Consensus expects earnings for 2Q12 $1.94 per share versus $1.96 2Q11. For FY12, OXY is expected to also show little to no growth in earnings per share. Eventually almost all stocks move up or down based on earnings growth and dividend growth, or lack there of. For OXY this fiscal year is shaping up as a "lack of" year as per any earnings growth. With the price of $4.00 per gallon gasoline today relative to the price of oil, somebody is making plenty more money than they ever have. OXY appears not to be one of those "somebodies". Who is on that somebody list is still a mystery, at least to me. But I have to cross off OXY.

OXY does have decent earnings in dollar terms, plenty enough so that if management chose to spend some of it to boost the dividend that would not be a problem. OXY currently yields 2.40% on that dividend, paying out $2.16 per share annually. With FY12 earnings expectations at $8.46 per share and consensus at $9.48 for FY13, OXY should be considered a low risk, good reward potential stock with an excellent chance to raise the dividend as earnings eventually improve over the next year.

Before we get into the options position, let's review the T3/OP video with JIll and Scott as they review the fundamental and technical cases for OXY:

Options traders do not normally get concerned about any time frame that involves years as time costs money and increases risk parameters the further that time is extended. They tend to maneuver around days to weeks and maybe months. I do think OXY will return to earnings growth and thus probable higher valuation levels, but that can take that precious time just mentioned. As such a time spread is one way to play OXY now, selling short that time with 100% controlled risk. This trade is medium in risk because it is totally controlled, while open ended in reward potential as any time spread bought is such.

Trades: Sell to open 3 OXY November 90 calls at $7.00 and buy to open 3 OXY January 2013 90 calls for $8.25.

The total risk for the trade is the premium paid, or $1.25, as long as the shorted strike does not become an exercise (for a dividend capture). That possibility would come into play if almost all of the time value in those shorted calls becomes eroded. As always, I will monitor the trade on this site in the comments section below.

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At the time of publication, Jill Malandrino, Scott Redler and Skip Raschke held no positions in the stocks or issues mentioned.