Oil -- When a Good Thing Goes Bad

Everyone rejoiced last year, not because of world peace, which would be nice, but because of the sharp drop in at-the-pump gas prices. According to the Energy Information Administration, average at-the-pump gas prices fell about 29% from the late June 2014 high to $2.22 per gallon on Dec. 29. AAA, which shared that gas prices fell during the prior 100 days, has reported gas prices hit a national average of $2.20 per gallon earlier this week, marking the lowest level since May 2009.

Proving that pennies do add up, AAA estimates that Americans saved about $14 billion on gasoline in 2014, compared to 2013. With annual gas prices averaging $3.34 per gallon in 2014 vs. current gas prices, it???s looking pretty good that we will be saving even more in 2015, as oil prices ratcheted even lower again this week.

Amazing to think that back in October the Federal Reserve put banks through their paces with a stress test that included a scenario of oil hitting $110 per barrel. It is still shocking to me how out-of-touch the Fed seems to be with the market sometimes.

As my father was fond of saying, ???when you spit up, it has to come down???–  and while that can be viewed a few ways, it relates to this conversation as a reminder that, while we are feeling our pockets a little heavier or our credit card bills a tad lighter thanks to falling gas prices, there is a dark side to it all.

There is a flip side to the benefits of lower oil and gas prices, and that has to fall somewhere; the effects have been much less sunny for oil companies, such as BP (BP) and Halliburton (HAL). What???s been described by oil industry executives as a ???Darwinian adjustment??? has companies like those cutting jobs. Models from the Federal Reserve Bank of Dallas indicate that if crude oil remains around $55 per barrel, Texas could lose 128,000 direct and indirect energy jobs by mid-2015. Big independent producers including Marathon Oil (MRO), ConocoPhillips (COP) and Apache Corp. (APA) have said they???ll cut their 2015 capital budgets as they tighten their respective belts for oil price pain. Cuts like those can only result in a disaster for companies like Civeo (CVEO), a provider of housing for oil workers in the Canadian oil sands industry.

This scenario does no favors for the earnings and margins of these companies. We???ve started to see Wall Street start to catch up and slash oil and energy company expectations, but it???s the commentary on the upcoming earnings conference calls that will tell the tale of how bad things could get in the coming weeks.

Candidly, I???m not all that optimistic we???ll see a big reversal in oil prices in the near term, because all of the data I have been looking at paints a picture of a slowing global economy. If you???re looking to double check my thinking, all you have to do is check in with Dr. Copper — that second opinion confirms global growth is slowing.

You would be wise to prepare for a bit of turbulence in the upcoming weeks.

Looking to get defensive? Consider Options

Many people tend to think of trading call options as a way to juice their returns as the underlying stock climbs higher. That???s certainly a smart strategy, and it???s one I use in my PowerOptions Trader service. What most new options traders tend to forget is that options also include puts, which allow you to position yourself to take advantage of the underlying security.

For example, from the above oil conversation, if you did your homework and believed the drop in oil prices was going to wreak havoc on Haliburton (HAL) shares, you could buy a put option that becomes more valuable as the price of the underlying stock depreciates relative to the strike price.

Another strategy that I???ve employed several times in PowerOptions Trader when things are looking more than a little dicey market-wise is to trade call options on exchange-traded funds (ETFs) that trade inversely to the market. Inverse ETFs are designed to benefit when the market goes down. Two great examples are ProShares Short Dow30 ETF (DOG), which is the inverse ETF for the Dow jones Industrial Average, and ProShares Short S&P500 ETF (SH), the inverse ETF for the S&P 500. For new options traders, and I know there are plenty of you out there, a call option on an inverse ETFs is a rather plain vanilla trade that allows you to profit in a down market.

If you???re new to trading options or just want to brush up on the subject, be sure to look for my new options video that will be coming at you in the next week or so.

In case you missed it, I encourage you to read my e-letter column from last week about why you should keep your portfolio active. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

Upcoming Appearances

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More than 30 hours of firsthand mentoring from me, Chris Versace, and 70 other elite traders is just a slice of what’s happening February 28 – March 2, 2015. Here’s more of what’s in store:

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