Yesterday, we placed a calendar trade in SLB into its earnings release after the close. The idea behind the trade was to fade the implied move of the event itself in order to finance puts for any further weakness within the group if crude oil does in fact retest recent lows. The event did not surprise and the stock is only down slightly. Here was the original trade and rationale:
Trade: SLB ($83.85) Buy July / Aug put calendar for 1.20
-Sell to open 1 July 81 put at .40
-Buy to open 1 Aug 28th weekly 81 Put for 1.60
Rationale: We like the idea of playing for a breakdown in the coming weeks as crude oil appears to have no shortage of headwinds in the near term. While vol doesn’t exactly appear high out in late Aug, we think it makes sense looking to finance the purchase.
The August portion of the trade was very reasonable vol and we didn;t expect it to collapse much after the event because the volatility in crude oil itself seemed to be whats driving implied vol in oil service stock options. And that’s played out pretty well as August 28th vol is really only down about a point. What that means is with the stock at 83.80 this trade is worth about 1.45, so a small gain at this point. The July 81 puts will expire worthless today and so we’ll have to figure out what to do with the naked August put on Monday. We still like the set-up here for oil to test its recent lows (crude is down again today) and with that SLB could retest its recent lows of $80. It’s lows on the year are closer to $76 and that may be the put we would like to use to spread in August. The other option is to roll the calendar portion and sell a put on one of the nearer weekly expirations. That could either be the same strike (81) or even lower like 80 or 79 creating a calendar vertical spread. Right now the 80 puts on July24th expiration are close to .30. Those could be a good sale if we see weakness in the stock. If we keep it simple and just stay within the Aug28th expiration look for us to spread by selling either the August 77 or 76 put.
Most likely we’ll wait until Monday to avoid commissions in closing the put that expires today but if the stock sells off today it could be worth it, so stay tuned.