Whiting Petroleum Corp (NYSE:WLL) has had a terrible year even before this week’s drubbing. Down 52% for the year, the crude crash Wednesday made a bad situation much worse for WLL stock holders.
As if that wasn’t enough bad news, FBR & Co cut the price target on WLL to $11 per share. The interesting part is that $11 would constitute a doubling from current levels. But given that this came after the recent Goldman Sachs and Credit Suisse downgrades, investors were only willing to shoot first and ask questions later.
They say that beauty is in the eye of the beholder. The lowest WLL analyst price target is $7. So either they are all wrong and will have to reprice. Or the correction is already an overshoot and a bounce is imminent.
In the absence of profitability I look to the company’s value to evaluate risk. Considering that it’s trading well beneath book value, WLL stock is not a grave risk fundamentally. So buying it with these metrics carries relatively tame risk for a high-beta stock.
Click to Enlarge Technically, there is not much to decipher from two-year WLL stock lows except to say that we are only three weekly candles away from a new low.
Some opportunity lies in the short interest. As Whiting Petroleum stock price slides, the shorts usually grow more brazen. Any bounce in price could cause a short squeeze.
No, I am not hoping for a WLL-specific rally, but rather a bounce in crude oil prices in general.
The Thesis: I’m betting oil prices are near a bottom. At these levels, it’s bad for OPEC pocket books and they are likely to prop it up. So a bounce is imminent, which should also start a commensurate rally in WLL. The bottom line is that I don’t think it’s game over for WLL, so I am willing to give it another go from the long side.
The Bet: Sell WLL Dec $5 put naked and collect 85 cents to open. If price falls below my strike, I will be put WLL stock and suffer losses below $4.15.
Furthermore, I am already long WLL, and even if my put strategy here fails, the shares that are put to me would go toward managing an existing long WLL strategy already in progress. That said, selling options is risky business, so I never risk more than I can 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.