Energy prices have been on a tear since Dec. 20. As a result, oil-related stocks have also benefited. For example Halliburton Company (NYSE:HAL) came into its earnings up 15% since then and that was on top of another 10% from two weeks prior. This morning, bulls are adding an additional 2% on earnings headlines and this worries me a bit and therein lies my opportunity today.
I want to short the near-term price action in HAL stock.
Before you label me a perma-bear, this is not a knock against the company or its prospects. This is a bet that prices have run up too far in a short period of time. In fact, I will use HAL’s own support to hedge my bet. I wouldn’t do that if I thought that the company is headed for a collapse.
Contrary to popular belief, OPEC still is relevant to energy prices, especially oil. Rhetoric under the new Saudi Arabia regime has changed. No longer do we see a commitment to keeping prices depressed so they can recapture market share. This is a double-edged sword. As prices rise, so will global non-OPEC production.
While this could be good for HAL, it could also bring about a correction in energy prices. A sharp dip from this altitude would certainly have a significant effect on already stretched energy-related stocks.
Fundamentally, HAL is not cheap. Its traditional price-to-earnings ratio is over 200 and the company operates with red net margins. Luckily, price-to-book is a reasonable 4.9 so although there is no comparative value, there is some overall value.
How to Trade HAL Stock
Technically, when a stock rallies as fast as HAL stock has, it leaves it vulnerable to a break in the rising wedge. This is the potential I want to capture. But since I have no major beef with the company fundamentals, I will hedge my bet by cutting my out-of-pocket expense.
There are opportunities for more technical momentum, especially above $58-per-share, but it was last January when it rallied to these levels before correcting 30% from there. I am not forecasting the same outcome this time around, but I do anticipate that from here, the path higher won’t be as easy as last month.
The bottom line is that I believe that here we have the opposite situation to a falling knife. I call them shooting stars, and some are easy to short without any out of pocket risk. HAL has run too fast too far and I want to try and profit from it.
The Bearish Trade: Buy the HAL Mar $52.50/$50 debit put spread for 50-cents-per-contract. Here, I need the price to fall through my spread for a chance to more than triple my money.
But since I am not bearish on the fundamentals, I will eliminate my out of pocket expense by using recent support in HAL stock.
The Bank — Optional: Sell the HAL Jun $45 naked put and collect 70 cents to open. This is a bullish trade, which has a 90% theoretical chance of winning.
Taking both trades would result in a net credit. So as long a Halliburton stock stays above my April sold puts, then any premium I recapture from selling my bearish put spread would be pure profit.
Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get my newsletter for free 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 as @racernic on twitter and stocktwits.
