Oil prices crashed off the highs. As a result, oil company stocks, like Chevron Corporation (CVX), corrected sharply lower to multi-year levels until February of 2016, when there was a headline of an oil production freeze deal that caused an impressive rebound. Consequently oil prices almost doubled and are now resting at $50 per barrel. The United States Oil Fund LP ETF (USO) clearly shows the mark in time and the resulting rise oil prices.
Click to Enlarge The oil bounce breathed life into oil companies stock prices. To some, it was desperately needed; to others, it was too late. CVX is an oil giant that was not in danger of folding, but it still suffered.
Since the low, Chevron’s stock price rallied past an early March breakout point. It may have already hit its possible measured target. Year-to-date, CVX is up 14%. But considering the last 12-month period, it’s only up 3%.
I had no doubt that CVX was going to be a survivor of the oil price crash. Leaders of the energy industry had the chance of buying up bargain assets of weaker and suffering competitors.
Consensus is that the current crude oil $50 price per barrel is resistive. If so, current price-earnings ratios are too high. There will be a period of adjustment over the next few months as CVX metrics moderate while operating at the higher oil price levels.
Meanwhile, I think that the CVX stock price is vulnerable. I am not forecasting doom, but there might be an opportunity to scalp some profits from a bearish trade setup. The easy money from the oil rebound has been made. So from here, investors are likely to chase alternative areas of opportunity.
Click to Enlarge Trying this short idea will cost me nothing. I will use a pair trade where one is bearish, but that is financed with a cautiously bullish second trade.
Trade #1 — The Short: Buy CVX Aug $100/$97.50 debit put spread. This is a bearish trade for which I pay 58 cents per contract. This is my max potential loss. If CVX stock price falls below $97.50 per share I stand to ideally gain $1.75 per contract. To completely eliminate my out of pocket expense, I want to set a second trade that gives me the opportunity to collect some premium.
Trade #2 — The Bank: Sell CVX Jan $82.50 put. This is a bullish trade for which I collect $2 per contract. I only sell naked puts if I am willing and able to buy CVX stock at the strike price. In this case I am committed to buying CVX at a 20% discount from current levels if CVX falls below $82.50 per share this year. Trade No. 2 can be modified to be a CVX $90/87.50 credit put spread for a more finite bullish risk.
Trading options can be dangerous but if done properly is an exciting arena. There are literally hundred of ways I can set up to trade a thesis. The key to success is proper risk management. Even though these trades are longer dated, I am not committed to holding either of them into expiration. I can close any trade for partial gain or loss by reversing the process.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
