Oil and energy stocks have been hammered in recent months and, with oil dropping below $50 a barrel to start the week, investors have been clamoring to jump into the quicksand as they look for a “bargain.” However, they might need to have some rope to hold on to in case these stocks continue to sink.
Like most companies in these sectors, Halliburton Company (HAL) shares have been in a free fall since peaking at a high north of $74 last July. While it has been tempting to start nibbling on shares at current 52-week lows, the break below $50 last October was an early warning sign that multi-year lows would come into play.
The three-year weekly chart below shows continued risk to $35 – $30, with the possibility that HAL stock could fall into the high $20s.
Halliburton may have deserved to trade at a higher premium, as HAL stock has matched or beaten Wall Street’s earnings estimates for the past four quarters. Last quarter’s beat of 9 cents per share was impressive, and the preceding quarters yielded a match of 2 cents per share and a beat of 4 cents per share.
Halliburton Company’s next earnings announcement is scheduled for Jan. 20, and Wall Street has penciled in a profit of $1.14 per share on $8.9 billion in revenues. The high estimate is calling for Halliburton to earn $1.24 a share, while the low forecast is at $1.05 a share. This could make for a beat of 10 cents per share or a miss of 9 cents per share.
The longer-term chart also shows solid $5 – $10 moves every three months over the past few years, and much of the action has centered around earnings.
At $38, a 10% move from current levels would have shares pushing $42 or testing $34. This is easily possible on the earnings announcement. Taking it a step further, an $8 pop or drop over the next month would be roughly a 20% swing and is also possible given the dramatic moves in recent months.
There are weekly options available to trade on Halliburton, and the regular January options expire next Friday. Traders can look at the February and March option chains to provide a possible strangle option trade more time to play out. These types of option trades provide insurance.
The goal of a strangle option trade is to make enough money on one side of the trade to offset the other side. It doesn’t matter whether it is the call or the put option that offsets the cost of the other.
The other important factors in a strangle trade are not to overpay and to do the math.
The HAL March 42.50 calls and the HAL March 35 puts could be used to play a possible rebound in the stock to $45 – $46 or a test to $32 – $30 by mid-March.
By using the March options, the trade has two months before expiration, which would provide plenty of time for shares to make this type of move. The cost of the trade at current levels would be roughly $2.75 – $2.80. To make the math easy, I rounded up to an entry cost of $3 for both of these HAL options.
In order for the aforementioned strangle option trade to make money, shares of Halliburton will need to be at or below $32 by mid-March or above $45.50.
If shares are at $32, the HAL March 35 puts would be $3 “in the money” and would cover the cost of the trade. The calls would expire worthless. At $31, the puts would be worth $4 for a 33% overall return. At $30, the puts would be worth $5 for a 67% return.
On the flip side, if shares trade to $45.50, the HAL March 42.50 calls would be $3 in the money. The puts would expire worthless. If shares are at $46.50 or $47.50 by mid-March, returns of 33% and 67%, respectively, would be achieved.
I am not sure where earnings will come in for Halliburton or if it will miss or beat by a mile. The only concern that I have as an option trader is where shares will be after the earnings announcement and by mid-March.
Going long or short only, without protection, is a gambler’s bet when trading earnings. Halliburton’s forecast will be more important than the numbers it reports, which is the trickiest part of making a prediction.
I will be watching Halliburton into its earnings announcement, but, at current levels, it is still too early to say if HAL stock has “bottomed” or if it’s a “buy.”
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