To successfully trade options you must have a catalyst and an exit plan. High probability option trades are rare but recently I found a mispriced stock with a catalyst that is set up perfect for a quick options trade.
Whenever there is significant insider buying in a stock, especially when by the CEO or Founder of a company I pay attention. Over the last week Richard Kinder, the CEO and Founder of Kinder Morgan, Inc, purchased almost $10 million shares of $KMI stock at an average cost of $32.50. The stock is currently trading at $32.21.
Secondly the stock has formed a double bottom and has strong support at $32. The stock has recently been sold off for non fundamental reasons, including the stock declared its dividend on Feb. 18th, which always causes a sell off especially in high yielding dividend stocks like $KMI, Kinder Morgan currently has a 5% dividend yield.
So the catalyst is the significant insider buying and the best way to play a bounce in this stock after its sell off, is to use my secret stock replacement strategy.
My secret stock replacement strategy, uses deep in the money call options as a proxy for buying the stock. I use this strategy when I am looking for a quick bounce in an oversold stock with a catalyst, which is exactly the situation with Kinder Morgan.
The trade I would make is to buy 10 March Kinder Morgan Call Options at $2.35, and you are only paying a $7 cents premium over the stock price (why I call it a stock replacement strategy). Also the March $30 Calls will move almost one for one with the stock, (again you are basically owning the stock with almost no premium). By purchasing 10 calls I am controlling 1000 shares of Kinder Morgan for only $2300 instead of $32,000 which is what it would cost to buy 1000 shares of Kinder Morgan.
My exit plan is to put a GTC order $1 above my fill price, as I looking to make a quick $1000 on this trade in less than 3 weeks, for a 40% Internal Rate of Return on my investment. Once it hits my GTC order $1 above my fill price I am out with a $1000 profit.
I will sell the option if Kinder Morgan, the stock, closes below $32, its that simple.
President of The Billionaires Portfolio