Oil To $100?

Good afternoon to all 16,690 subscribers. Glad to have you with us. This week we published two actionable microcap ideas. One is a trademark and branding company that we believe has 2-4 bagger potential over the next 3-12 months as a potential asset sale is near. The second is a men’s retail clothing store that we see as a clean double over the next 6-12 months as a reopening investment. Subscribers can find these ideas below”

The trademark company fell 20% yesterday on zero news. I commented on the article saying I was adding substantially to my position.

The additional investment has paid off in the short-run with a quick run-up in the stock price today. I’m expecting the company to report earnings later this week or early next week.

Next week we plan to release another actionable report on another clothing retailer that we think could be at least a double with limited downside. This clothing retailer has seen insane levels of growth in their online segment which we thinks bodes well to a positive future and a “re-rated” valuation a few turns above normalized EBITDA.

If you like access to our small and micro-cap “actionable” research reporters subscribe today. Feel free to shoot me an email if you ever have any questions.

Oil to $100?

Oil bounced back today after a rough few days. The United States Oil Fund ETF (USO), rebounded today after nearing the 1-month low of $40.07 per share from the Suez Canal tanker squeeze. USO is up about 5% today as of this writing, and several oil & gas stocks are leading the market today. 

What does this mean for you?

Obviously no one can predict these daily fluctuations ahead of time. Sure, you would have made good money buying puts on oil companies Monday at the close and calls yesterday. But how would you know to do that? At best, you’re just gambling on 50/50 propositions.

The takeaway here is that you should find a trade or theme that you are bullish on over a mid-term time horizon, and use the daily fluctuations to your advantage. Use the dips as opportunities to buy, and the spikes as chances to take profits or trim positions. 

For example, I think reopening the physical economy will go really well over the next six months or so; I also believe that not all of the upside is currently priced into those stocks — especially the small and microcap names that most of Wall Street tends to forget about.

I am looking to gain exposure to names that will benefit as the economy reopens. I think by the time Q2 numbers are reported in mid-summer, reopening stocks will be much higher than they are today — along with great comps from the past summer as everything was shut down.

Oil can fit into this narrative as well

If you are mid-term bullish on oil, day-to-day fluctuations shouldn’t bother you much, unless there is substantial new information to change your forecast.

Down days should be used as time to average down. 

Let’s say I have $50,000 to invest into my reopening thesis right now. It wouldn’t be the best idea to deploy all of my capital at once, especially on an up day. I would instead want to average into my positions over a few weeks or even a couple of months to reduce the risk that I buy in just before some negative aberration that puts me in a 6% hole immediately.

If you make it a habit to deploy your capital on price dips, you’ll likely have higher gains from your mid-term investing strategy than if you dumped all your capital in at once.

Of course, getting in too late is a large risk, as well. Let’s say you became bullish on oil six months ago.

You obviously would’ve been better off deploying most of your capital within that first month or so than if you evenly spread out buying over the entire six months.

That’s why it’s important to keep in mind your own timeline.

For a reopening play, what is the time horizon? I might predict that the reopening trade will work well for the next five months or so — from now until about a month after Q2 numbers are released. If that’s the case, I’ll want to deploy my capital over the next couple of weeks. If I wait too long, I risk missing out on the trade.

This trade might work out for longer than five months, but if you see an opportunity you like that’s mid-term in nature, it’s best to jump on it sooner rather than later. In five months, the landscape could have changed, and the reopening trade could be exhausted.

Look at tech throughout 2020. It was a great trade for a long time, but at a certain point, it really exhausts itself and investors take profits to rotate into something new. 

If you saw the opportunity in tech starting in March 2020, you would’ve done extremely well into early February. But since then, the trade has run out of fuel. That’s not to say tech won’t continue to go higher going forward, but tech investors are down over the last six weeks or so. 

Overall, we expect oil and gas stocks will continue to outperform over the year. There has been a massive underinvestment into oil and gas related infrastructure for the past few years and the COVID-19 shutdown propelled the lack of investment into the sector. As individuals begin to drive, travel and do ordinary everyday things again, we expect the demand for oil and gas will outpace the supply.

This means one thing — higher oil.

Options Newsletter

We’ve launched an options newsletter. Here is a link to the free version. Check out this snippet of yesterday’s option newsletter: 

GameStop’s implied volatility (IV) is through the roof. Near-the-money options expiring Friday have an IV near 400%. In comparison, the same options on Tesla stock have about a 60% IV.

To answer the original question: I would not take a huge position in anything with GameStop options. If anything, you could sell 1 or 2 calls if you believe the GameStop rally is done for this week, but keep in mind your potential losses.

In this scenario, I would look to sell far out of the money (50% or more) calls just after an upward spike, and then close them out quickly for a 25% gain using a limit buy to cover order.

Typically, you want to sell premium on companies that have high IV, but not ones where massive rallies or corrections routinely happen.

Remember, it’s not a cheat code to sell extremely high-priced GameStop calls. The market is pricing those calls highly for a reason, and you could lose your shirt.

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