ConocoPhillips Stock Running Out of Gas (COP)

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ConocoPhillips (COP) shares have been a relative underperformer lately to other major oil stocks, as evidenced by the divergence between COP and the Energy Select SPDR ETF (XLE).

While the XLE, which is comprised of the biggest oil company names like Exxon Mobil Corporation (XOM) and Chevron Corporation (CVX), has broken out to the upside recently, COP has struggled to power past resistance.

On the heels of a lowered dividend and concerns by company officials over lower oil demand and higher supply, I look for ConocoPhillips to continue to have trouble moving appreciably higher.

ConocoPhillips Stock Running Out of Gas (COP)

COP has been trading stride for stride with crude oil lately, with both approaching major overhead resistance.

For crude oil, $38 is a formidable resistance level. COP has a similar resistance area at $41. With the recent strong rally in oil looking a bit tired, any pullback in oil prices should be a definite negative for shares of COP stock.

From an options perspective, implied volatility (IV) is approaching the lowest levels of the year. Implied volatility was trading near 70 a month ago, but now is trading under 50. Not only are low levels of IV a good contrary bearish indicator, but the low levels of IV also mean cheaper option prices, making long option strategies more attractive.

COPIV

The Trade for COP Stock

To position for a pullback in ConocoPhillips, I am looking to use a put diagonal trade. This positions bearishly (18 deltas short) while hedging off some of the initial cost of the trade. It also allows additional selling of shorter-term options against the long position to further reduce the initial entry cost.

Buy COP April $38 puts at $1.25 and sell the COP March 24 $37 puts at 25 cents for a total net debit of $1.

The options being bought are the regular April monthly options that expire April 15, while the options being sold are the weekly March options that expire March 24.

The maximum risk on the trade is the net debit paid, which equates to $100 per spread. I would look to stop out the trade on a meaningful move through the $41 resistance area on COP stock.

As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at tbiggam@deltaderivatives.com.

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Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.


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