At the end of Mach we pointed out crude oil’s break of trend:
Two weeks ago Crude Oil broke its year-long uptrend, and is now down more than 10% on the year and nearly 14% from its 52-week highs made in Jan:
Crude 1yr chart from Bloomberg
On the day of the post, Haliburton (HAL) had just broken its trend and volatility had popped. We wanted to press that on the short side but needed to account for both the move that had just happened and the pop in implied vol. We did so by highlighting calendar opportunity:
As far as positioning for further downside, like we said, it’s a hard press. But one way to define risk to a small amount is to use the recent weakness and pop in implied vol to sell a put that expires before the company’s scheduled earnings (April 24th) to buy the same strike put in June:
Bearish:
HAL (47.85) Buy the April/June 45 put calendar for 1.00
Sell 1 April 45 put at .40
Buy 1 June 45 put for 1.40
This turned out to be the proper structure because Haliburton bounced afterwards, but the April vol collapsed, helping to cover the delta loss on a move higher. The bounce in the stock didn’t last long and the short April puts expired worthless as the stock collapsed alongside crude oil:
Oil prices struck a new 2017 low on Thursday as mixed U.S. stockpile data compounded bearishness that has permeated the energy complex in recent weeks.
The HAL trade idea is now just a June 45 put. With the stock 44.05 the June puts are worth more than a double at 2.20, vs the original cost of 1.00.
Now What?
For those happy with that return, there’s nothing wrong with taking profits. Intrinsically this trade is only worth .95 vs the 2.20 mark to market. In other words, if the stock closed here on June expiration, the entire current profits would be lost. So taking profits here makes sense.
But there’s more money to be made if the stock continues lower. But for those wanting to stick around for that, reducing risk is the prudent thing to do here:
ACTION – vs 1 June 45 put (current value 2.20) sell the June 42.5 puts at 1.00
New position: Long the HAL June 45/42.50 put spread for free
Breakeven on June expiration:
No Gains above 45, but no losses
Gains of up to 2.50 below 45 with max gain at or below 42.50
Rationale – Creating a spread in June doesn’t lock in profits (if the stock is above 45 there is nothing done, no losses, no gains) But it now becomes a free look to make up to 2.50 if the stock continues lower with no risk (other than current profits) if the stock goes higher. For those wanting the profits now, just sell the Junes 45’s for a 1.25 profit. Or an even better way to do this is to sell half for a profit, and spread the other half if you own multiple contracts.
