Whiting Petroleum Corp (NYSE:WLL) stock has not had a good year. The stock fell almost 50% since January’s $13.30 per share double top. This is not a Whiting-specific problem but rather a sector challenge. Falling oil prices is the major contributor to this mess.
Fundamentally, WLL bears have legitimate beef with the company’s prospects. And the recent dip in oil compounds the fears. I am not one who believes that oil prices are slated to rally, so this should make me a bear on the stock.
Not necessarily so, since today I want to sell risk against an even worse case scenario to generate income from the current fear levels in WLL stock.
Often it is expectations that drive prices. This was the case here. Analyst expectations are overwhelmingly flat as a hold. Then came the Goldman Sachs downgrade to “sell” to inflict pain onto those long WLL stock. This could open the flood gates for more analysts to do the same.
Click to Enlarge Technically it’s never a good idea to catch a falling knife, especially one whose fundamentals are in doubt. Whiting stock price having fallen to the single digits also creates downside pressure. There are many investors who don’t invest in stocks under ten dollars per share, which leaves a certain imbalance in supply and demand for the stock.
Luckily, I can use the options markets to structure a trade that commits long Whiting stock but with some room for error. The thesis is that WLL should soon find footing. This area that it has recently fallen into has been support since March of 2016. It is important to note that I am not betting on a rebound in price. I merely need prices to stabilize so I can generate income.
WLL Stock Trade Idea
The Bet: Sell WLL Dec $5 puts and collect 45 cents per contract. Here I have 70% theoretical chance to retain my maximum gains. Otherwise, if price falls below my strike then I own the shares and would suffer losses below $4.55.
Selling naked puts is not appropriate for every investor, and for those I can accomplish the same goal with a credit put spread instead. There I would have limited risk.
The Safer Alternative: Sell the WLL Dec $5/$4 credit put spread where I have about the same chances of success yet still yield 28%. Compare this with risking $7 buying the stock here with no buffer then hoping it recovers 28% just to match the performance of the spread.
Selling options is risky business, so I risk only what I am willing to lose.
Learn how to generate income from options 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.
