Shares of Chevron Corporation (CVX) have been mired in a narrow trading range over the past several weeks, and at least for now, the likely end game doesn’t look promising.
Click to Enlarge Right now, traders are best off looking for bullish trades on Chevron stock. And that’s exactly what we’ll look at today.
CVX is staring at a trading range that boasts resistance at the $92.65 level and support at $87.80. The 200-day moving average of $95.16 for Chevron stock provides additional overhead resistance, while the 50-day MA of $88.68 lends another layer of support.
Click to Enlarge Yesterday’s price action in CVX was telling, with Chevron opening slightly higher at resistance only to fail once again to break out, closing just off the low at $90.25. Implied volatility did edge up slightly on the reversal in CVX yesterday, bouncing off the recent lows.
Crude oil continues to display weakness, as crude futures traded briefly below the $40 level yesterday. Chevron — the second largest integrated oil company in the U.S. behind Exxon Mobil (XOM) — is normally highly correlated to the price of crude. Since early October, however, that correlation has broken down, with crude falling 18% in that time frame, while Chevron stock remained virtually unchanged, as seen in the chart.
Click to Enlarge With CVX trading at such a substantial premium to crude, it will likely be difficult for Chevron stock to break through overhead resistance at the $92.65 level without a major turnaround in oil prices.
With the ongoing supply glut in oil continuing to weigh on crude pricing, along with slowing growth in China and worldwide, it will be difficult for oil to stage a meaningful rally.
While crude futures did bounce slightly off the $40 level, a break below this critical psychological support could provide the impetus for a sharp selloff in CVX. Barring a major rally in oil, the correlation between Chevron stock and oil will at some point revert to the mean, with a meaningful break of the $87.80 support level.
With implied volatility still at the lower end of the recent regime, I favor long option strategies to position bearishly in CVX shares.
Chevron Stock Trade Idea
I would look to go long a diagonal spread, buying the CVX Jan $85 puts for $1.70 debit while selling the CVX Dec $83 puts for 50 cents to defray some of the cost. The total net debit on the trade is $1.20, which also is the risk.
Ideally, Chevron stock closes near $83 on December expiration to realize the maximum gain.
The spread positions 14 deltas short, while allowing additional short-term put sales versus the Jan $85 puts to further hedge the position.
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 [email protected]