In July we entered a bearish defined risk trade in SLB with the thought that it was likely to test its recent lows with little chance for a reversal in crude oil on the horizon given the current supply/demand dynamics. Here was the original trade and rationale from July 16th:
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 calendar worked well coming out of the earnings event and we then on July 24th we spread the Aug28th 81 put by selling a lower strike put in the same expiration forming a vertical put spread. Here was that trade management and the current position:
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
SLB is now testing those recent lows at $80 and it’s not a hard argument to make that crude may have a tough time falling farther from here. We’re going to take our profits while the stock is at support and move on:
Update: Sold to close the SLB ($80) Aug28th 81/76 put spread at 1.55 for a $1 gain
RATIONALE: we kind of have this trade where we want it, but crude is trying to hold on for dear life here today, and SLB is showing very good relative strength to drillers like HAL which is down 2.9% on the day. We started out risking 1.20, but that was for a short period of time into earnings, and after spreading the risk was only 55 cents.