Just like with the energy sector in general, 2017 has not been kind to Chevron Corporation (NYSE:CVX) stock. It is now about 11% lower than where it started the year. Oil prices can be partly blamed for this, but the slide started well before oil fell.
Fundamentally CVX, much like Exxon Mobil Corporation (NYSE:XOM), is beyond reproach. It’s a long-term proven performer, and management is not apt to create undue drama. However it’s not cheap relative to its peers, at least not from the price-to-earnings-ratio perspective, but the analyst expectations are in check so the risk of heavy disappointment is muted.
Technically, CVX stock has been riding a descending channel and now is at a level that had been long-term pivotal. In the shorter term, there could be a reversion to the mean towards $111 per share, but there will be several layers of resistance that stand in the way.
Click to Enlarge Often, simply looking at the 12 months can be misleading. While the 12-months chart may suggest Chevron stock could be near a bottom, the weekly chart clearly disagrees. There is cause for concern, so I most definitely need a buffer zone as I did back in March when I shared a trade that paid me well.
Furthermore, knowing there is resistance I can’t in good conscience risk $105 buying the stock outright especially not when markets in general are this close to all-time highs.
To make matters worse, oil prices are falling precipitously and OPEC has been slow in renewing the production cut deal that is due to expire soon. So I will use options, where I can structure a trade setup so that I have room for error.
CVX Stock Trade Idea
The Bet: Sell the CVX Dec $80 put and collect $1 to open. This is a bullish trade that has a 90% theoretical chance of expiring worthless in my favor and for maximum profit. I only sell naked puts if I am ready to own the shares at $80 and accept the losses that may come under $79. Otherwise, I can change this into a credit put spread instead which could yield 10%.
Going long CVX stock, now I have to acknowledge the possibility of another bearish pattern that could be in the making. Losing the recent low of $104 could bring about momentum sellers to retest $98 or lower.
Given the 24% price buffer and the time until expiration, I am confident that I would be able to manage the open risk against the short term price drops. If CVX rallies in the next few weeks I could sell opposing risk for balance and the potential of more profits. Doing this now after a 10% correction would mean that I would be selling the risk at a steep discount.
E-mail sellspreads@gmail.com with questions or join me to learn more about options in a personal 1on1 webinar here. 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.
