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Trade Of The Week: Long Call on Santos Limited (ASX:STO)

January 13, 2021

Trade Of The Week: Long Call on Santos Limited (ASX:STO)

Crude oil has been performing relatively well since the price inversion on 20th of April 2020, and more recently since November 2020. Natural gas has also seen a recovery since July 2020.

Crude oil has been performing relatively well since the price inversion on 20th of April 2020, and more recently since November 2020. Natural gas has also seen a recovery since July 2020.

The de risking of the world following the US election and the discovery of several coronavirus vaccines (in record time) has the world economy looking towards the light at the end of the tunnel. Across the world we are expecting 2021 to see a gradual rollout of vaccines and towards the end of the year a reopening of some borders to vaccinated travellers.

With oil being the lifeblood of industrialised nations economies we expect demand for oil to increase as economies start to open up again. From a macro level the oil industry is looking good for 2021. We expect strong performance from the natural gas sector as the world economy transitions away from carbon-intense fossil fuels and utilises LNG as a ‘transition’ fuel on the pathway towards a renewable energy world.

On the 5th of January Santos Limited announced a US$235 million Phase 3C infill drilling program at the Bayu-Undan field in the Timor Sea, offshore Timor-Leste. Santos Limited is the operator of the Bayu-Undan Joint Venture. (Source: ASX)

In the ASX media release dated the 5th of January 2021, Santos Limited notes a close and constructive relationship between the joint venture partners and the Timor-Leste Government. This relationship will be important for future exploration and extraction endeavours in the Timor Sea as the Joint Petroleum Development Area transfers to Timor-Leste’s exclusive jurisdiction under the Australia and Timor-Leste maritime boundaries treaty.

In other words, on an idiosyncratic level Santos limited looks like a viable energy player in this region of the world.

The stock has experienced some strong momentum since the January 5 release and continues to look very bullish. With macro and micro views aligning, and the stock price still well below pre-COVID highs, we should expect this breakout to continue into February.

Source: Implied Volatility

As Santos Limited (STO) continues its break out move we will enter a long call position on STO so we do not cap the upside:

We will set the expiry date to the 18th of February 2021. We want to capture as much upside as possible so we can hold the position until expiry. However if the stock quickly reaches pre-COVID levels around $9.00 we could consider closing the position to take the profits, as implied volatility is quite high at 36 making a long only position very susceptible to time decay. Just keep in mind though that the stock could push through the $9.00 resistance level and continue flying higher.

We believe you should enter the position one full strike higher from the current stock price.  

If you would like some more information on options trading strategies, call 1300 805 795. 

You can also follow this link for a detailed tour of the Implied Volatility platform.  

To try trading for yourself using the most powerful Options Trading technology in Australia, click here for a trial for our Implied Volatility platform

We wish you good luck with your trading, and as always if you have any questions, please feel free to contact our trading desk on (03) 8080 5795. Please note, we provide General Advice only.

 

Past performance is not a reliable indicator of future performance. The opinions expressed in this article are our personal views. 

Trading options is not suitable for everyone. There is a risk that you can lose more than the value of a trade or its underlying assets. You should only trade if you are confident that you fully understand what you are doing. If you are thinking about acquiring a financial product, you should consult our Financial Services Guide (FSG) at www.reachmarkets.com.au first. 

 

 


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