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How to play IOC the smart way

April 16th, 2008 · 2 Comments

The Elk4 appraisal well is coming to a conclusion, the results will either give the share price a tremendous boost, or sink it. We think the chances of an explosion of the price are way better, but one can hedge, or even profit both ways if played smart.

It looks very likely that results will be in end of April, sufficient time for May options to perform very nicely.

There are three possible scenario’s.

  1. Elk4 confirms that the Elk resource has large quantities of natural. The stock price will go to $40+
  2. There is also a meaningful quantity of oil found at Elk4. The stock price will really take off, $60+ at least.
  3. Results of Elk4 fail to confirm Elk as a sufficiently economic resource. The stockprice will collapse to perhaps $10.

There seems to be very little room for an inconclusive outcome. Either the gas (or oil) is deliverable, or it is not. Either the shareprice explodes, or it crashes.

If the drilling news is good, price action will receive an enormous boost by what could be considered as the mother of all short squeezes. There are presently more than 9M shares short of 31M outstanding shares. The float is 21M, so the shorts comprise almost half the float.

Buying May call options would be an excellent way to profit massively from the upside, but by buying some May put options, one can protect oneself, or, depending on the quantity one buys, one could also profit massively even if the results are negative and the shareprice collapses.

Options are the right strategy for that, the maximum one can lose is the price of the options, but options can manifold in value if there are big chances in the underlying shareprice, exactly the situation we are expecting here.

Drilling has a habit of surprise and there might yet be other delays. So if one wants to all but exclude that possibility, one could buy June, or even September options. This comes at a price though, these options contain considerably more time value and hence they’re considerably more expensive.

We will give you the reasons for why we think it’s much more likely that IOC will go higher shortly. Stay tuned.

Tags: IOC

2 responses so far ↓

  • 1 Does IOC have enough gas to support an LNG facility? // Apr 23, 2008 at 4:14 pm

    […] story, one that will lead to either an explosion or an implosion of its share price (we believe the former is more likely), we’ll increase our […]

  • 2 Carlo Civelli’s masterstroke? // May 9, 2008 at 2:43 am

    […] moment, but then again, things are rather exciting there. And we did advise you earlier to take a (hedged) option position (here a follow up). It’s still not a done deal, remember that. Hence the hedging. Now, those […]