Trade Update – Spreading $SLB puts

by CC July 24, 2015 3:04 pm • Trade Updates

Last week, into Schlumberger’s earnings (SLB), we placed a calendar put spread that looked to fade the earnings move but set up for further weakness afterwards if crude oil continued its decline. 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.

Oil has continued its decline and today SLB stock is down more than 3.5%. I updated the trade last week and said we’d like to wait for weakness to spread:

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.

We’re going to keep it simple and use August 28th puts.

Right now the Aug28th 81 puts we’re long are worth about 1.75 (our cost is 1.20) so decent gains, but we really think this stock has a chance to continue its decline towards 80 at least, so we want to stay in the position. But crude oil volatility is high and it could reverse on a dime, so we also don’t want to just be naked long those puts. So here’s the update:

ACTION – Against 1 SLB (82.90) Aug28th 81 put trading 1.75 (our cost is 1.20) sell 1 Aug28th 76 put at .65

New position – Long the SLB Aug28th 81/76 put spread for .55