Option Trade on Oil Services Giant

11/01/2011 7:00 am EST

Focus: OPTIONS

This call-option play on oil services giant Halliburton Co. (HAL) would result in a profit if the stock continues its impressive recent rally into December expiration, writes John Kmiecik, contributor to InvestorPlace.com.

The market has finally shown some bullishness and has gotten past some resistance that has held it down for the last few months. Now is the time to search for stocks that are in strong sectors.

One such name is Halliburton Co. (HAL), which provides products and services to the energy industry for the exploration and production of oil and natural gas worldwide.

Recently, this stock sector has been on a tear up. The stock has been trading significantly below most analysts’ estimates, and it may be the right time for this stock to head even higher.

Here is a daily chart:

chart
Click to Enlarge

Technically, on Thursday, the stock gapped above a resistance (now support) area around $38. That area should be able to support the stock, and a break of $40 would confirm that the bullish run is still in place.

With HAL trading around $39.13 (at time of writing), you can currently buy the HAL December 40 calls for $2.20 or less. (Be sure to check current pricing before placing any trade.)

With long calls, the trade profits when the stock rises, and the call premium increases as the HAL option moves more and more in the money. Maximum profit is unlimited because HAL can continue to rise, and the maximum loss is $2.20 if HAL finishes below $40 at December expiration.

A practical short-term target for HAL would be around $45, which is where the 200-day moving average currently resides. The December calls were chosen to give this trade idea some additional time to profit, but if the stock drops below another support area around $36, consider exiting the position.

By John Kmiecik, contributor, InvestorPlace.com

John Kmiecik can also be found at MarketTaker.com

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