CC’s analysis has a substantial amount of macro appeal, especially since the crude inventory levels are at historically high levels. My first instinct was to look for the oil names that both looked vulnerable and had put options that were not too expensive. My search narrowed down to OXY and APA, and I ended up choosing OXY after reading their most recent quarterly filing for any fundamental clues.
Here’s the passage that stood out to me from OXY’s most recent EDGAR filing on sec.gov:
Diluted earnings per share (EPS) were $1.92 for the first quarter of 2012, compared to $1.90 for the same period of 2011…The increase in net income for the three months ended March 31, 2012, compared to the same period of 2011, reflected higher oil prices and higher oil and gas segment volumes domestically. These increases were partially offset by higher oil and gas operating costs, depreciation, depletion and amortization (DD&A) rates and lower international oil volumes and domestic natural gas prices.
In other words, their EPS was basically flat, despite higher than expected revenues due to higher oil prices. That is bad news if oil prices drop, since their increasing expenses are likely much stickier (harder to decrease) no matter what oil prices do.
Finally, on a technical basis, OXY had an important break of 6-month support at around $87 yesterday on big volume:
Today’s bounce offers an opportunity to play for a continuation of that break.
Here’s the trade:
TRADE: OXY ($85.75) Bought the June 82.50 Put for 2.15
Break-Even on June Expiration:
-Profits below $80.35.
-Losses of up to $2.15 between $80.35 and $82.50, with max loss of $2.15 or a little less than 3% of the underlying
Trade Rationale: My goal is to turn this trade into a put spread by selling the June $77.50 put if OXY makes another move lower with crude like we expect. I am going to put on half a position now, and look to add the other half in case the stock rallies. However, given that break of support at $87, I want a position on in case it continues lower from here. June gives us more than a month for the thesis to play out, and increased flexibility to manage it going forward.