Back on May 25th we checked in on Oil, the XLE, and SLB in particular. Here’s a little of what we had to say at the time:
In aggregate, oil stocks, represented by the XLE (the Energy Select etf) are basically down in lockstep with the commodity, about 15% from its 52-week highs in December, and down about 10% on the year. The two largest components in the XLE, Exxon (XOM) and Chevron (CVX) make up nearly 40% of the weight of the etf, and both are down about 10% on the year. Which makes sense. But its the third largest component, Schlumberger (SLB), at 8%, that is catching my eye, down 17% on the year, today making a new 52 week low, and down about 20% from its 52-week highs made in mid-January. To be frank, SLB’s chart is a mess, and seems destined to make a run at the 2016 and 2012 double bottom low near $60 in the not so distant future, with a look of a head and shoulders top formation
XLE was 69.40 at the time of the original post. Here was the bearish trade we detailed at the time:
The next identifiable catalyst for SLB will be its Q2 earnings confirmed for July 21st, before the opening. If I were inclined to play for a re-test of $60 between now and then I might consider a put spread in July expiration, which catches earnings the morning of expiration. For instance:
with SLB at $69.40 you could buy the July 70 / 60 put spread for $2.50
-Buying 1 July 70 put for 2.70
-Selling 1 July 60 put at 20 cents
With SLB now lower at $66, this put spread is worth about $4.00, so a nice profit, but also more overall risk now as it’s $4.00 (including 1.50 in profit) to make $6. Therefore it may make sense to roll here. One roll is to close the 70 puts and roll them down to at the money, creating a 66/60 put spread for a credit. That roll books about .20 in profits and allows for additional profits if the stock continues lower. It stays positioned for the earnings which is the morning of expiration.
ACTION – Sell to close the SLB July 70 puts at 4.25
Buy to open the SLB July 66 puts for 1.55
Rationale – The worst that can happen is to make .20 on the trade. The rest is a free look. But this does keep most of the rest of the profits at risk. (the entire trade could be closed now for 1.50 in profits) Therefore this is only for those looking for even lower in the stock, and management should continue into earnings as a slight bounce from here may mean it makes sense to take off the entire trade and book most of the additional profits and move on. The same goes if the stock goes lower into earnings where you could book additional profits before the event. In other words, the trade shouldn’t be ignored into the earnings just because it’s a free look.