Take a Free Ride on Oil

In a recent Trade of the Day, I mentioned three energy plays that were on my screen.

One of those companies was Encana (NYSE: ECA), the oil and gas company that made headlines by taking over Newfield Exploration in November. I also liked its prospects based on what insiders were doing. They were buying shares after the deal was announced despite the weakness in the oil and gas market.

In The War Room beta, we took a position in Encana call options that expire in the next few weeks. It’s an earnings play, but smart speculators don’t take the conventional route. We looked for a very inexpensive way to benefit from a potentially explosive upside surprise.

We could have waited until the week of the earnings release, but instead, we took the position that the shares would react positively leading up to the release. The oil market was acting nicely thanks to OPEC’s cuts in production and lower interest rates.

What happened next caught us off guard and resulted in the absolute best-case scenario.

A couple of days after our favorable call on oil and gas, energy giant Chevron announced a deal to buy a smaller player, Anadarko Petroleum.

Our options immediately doubled on the news, and we sold half the position that we took to get our entire initial investment off the table. That left us with the other half of the position and a full month to go before the options expire.

In addition, the earnings release will occur two weeks before expiration. This gives us the ability to make money not only in the run-up to the release but also possibly after, if the shares react positively!

Our cost in the remaining position is zero, giving us one of those rare opportunities to have nothing at risk and unlimited upside.

Takeaway: The whole point of smart speculation is to put a little at risk to potentially make a lot. In this case, we have nothing at risk! Inside The War Room, we use calculated, precise strategies, like the one we are using on Encana right now, to position ourselves for substantial moves.

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