There is no sugarcoating it: We are in the midst of a pretty nasty bear market, which unfortunately means we are going to be stopped out of our Cleveland-Cliffs (CLF) position today.

Cabot Profit Booster Issue: May 10, 2022

Market Overview
There is no sugarcoating it: We are in the midst of a pretty nasty bear market, which unfortunately means we are going to be stopped out of our Cleveland-Cliffs (CLF) position today.

To execute this trade you need to:
Sell your CLF Stock
Buy to Close the May 33 Call

Moving on …

Last week started off relatively calm as the S&P 500 rose modestly Monday and Tuesday.

However, the calm nature that defined the beginning of the week changed drastically late Wednesday when the S&P 500 had its biggest one-day rise since May 2020 following the Federal Reserve’s announcement on interest rates. Unfortunately for the bulls, those gains didn’t last long as Thursday was witness to the biggest one-day decline since May 2020, and Friday, while not record-setting, was extremely volatile.

Yesterday was another day of brutal selling as the S&P and Nasdaq each fell more than 3%.

And while this selling can be painful, in terms of our Profit Booster portfolio, the rising VIX and options prices can create some wonderful opportunities, which brings me to this week’s idea, which we will play defensively just in case the recent bear phase isn’t yet over.

The Stock – Delek (DK)
Why the Strength
Delek is a diversified downstream energy company with assets in petroleum transportation and storage, asphalt, renewable fuels and even convenience stores. But refining is Delek’s specialty, as the firm is able to process 302,000 barrels per day of crude from its four U.S. refineries; refining tends to be less impacted by falling oil prices and more impacted by the spread between input costs (crude oil) and output prices (for their end product).

Dramatic improvement in the refining landscape has prompted a number of Wall Street institutions to boost their outlook for margins in 2022, while Delek has expressed optimism in what it calls a “robust macro environment.” The company just released Q1 results that blew estimates out of the water (a reason for the strength), including revenue of nearly $4.5 billion that was up 86% from a year ago, and EPS of 58 cents that beat expectations by 69 cents.

The strong industry backdrop gave Delek the confidence to repurchase around 5% of its stock in March (!), with plans to further enhance the balance sheet and return cash to shareholders throughout the year. Further, management said it has no major planned CapEx this year, which is music to investors’ ears.

The company also updated its planned acquisition of midstream company 3Bear Energy, which Delek said would allow it to achieve midstream EBITDA of around $380 million per year while increasing its reach within the resource-rich Permian Basin. Analysts see the good times continuing and predict 60% sales growth in Q2. We like it.

Technical Analysis
DK hit a major peak in mid-2018 at 60 and spent the next couple of years tumbling before reaching a nadir at 10 in October 2020. A powerful rally followed over the next four months, but this was terminated at 27 last February. DK needed most of 2021 to consolidate and build a deep base for the next phase of its bull run that finally blossomed in March and which resulted in shares hitting their highest level since 2020 last week. The dip of the past couple of days has been sharp but normal, so if you want in, you could nibble here. Stop—20

The Covered Call Trade
Buy Delek (DK) Stock at 25, Sell to Open June 25 Strike Calls (exp. 6/17) for $1.75, or a Net Price of 23.25 or less

Static Return: $175 per covered call (7.52%)

Breakeven: 23.25

Covered Call Return (if assigned): $175 per covered call (7.52%)

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or less. (In this case 25 minus 1.75 = 23.25. Or another example is you could pay 24.75 for the stock and sell the call for 1.50, which also equals 23.25)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on May 17, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader and Cabot Options Trader Pro advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.