When the equity markets started the correction on Feb. 2, Halliburton Company (NYSE:HAL) stock had already started its own 7% slide off its earnings event. Then HAL tacked on another 15% with the rest of stocks on a slew of headlines from tariff wars to geopolitical unrest.
Since mid March, HAL has mounted a strong 15% rally, which is a statement to the quality of the stock. Unfortunately, this is becoming a habit for stock. In February of 2017, HAL also fell hard after the earnings but the correction then was much deeper and perhaps would have lasted a lot longer. From the looks of it, this time the bulls are making a stand above this February’s lows. And therein lies my optimism.
Today, my view is that the worst is behind HAL stock and not yet to come. But instead of banking on a strong rally, I am betting that support will hold for the next few months. But these are turbulent times for stocks so I want to take the safer route by using options.
This morning HAL management reported earnings and the reaction in the stock is less than enthusiastic. It’s down 2% even though they beat the expectations. But these days investors want more and so far they don’t want to give the company the benefit of the doubt.
Fundamentally, the company is not cheap from the traditional price-to-earnings ratio. So it’s hard to argue for value. But this is where investors have to assign a value to the quality of the management team and the company history.
Technically, the stock is well off the 2014 highs and at the same time it has emphatically rejected the 2016 lows. And I believe that most often, extremes are usually mistakes so somewhere in the middle lies the truth. And here lies my opportunity to cautiously trade Halliburton stock in this turbulent market.
Click to Enlarge Instead of buying the stock at face value and leaving absolutely no room for error, I will use options where I can build a buffer from current price and my risk level. My major concern at this point is the elevated level of crude oil prices. Haliburton stock tends to trade in lockstep with crude oil which has been on a tear of late.
My worry is that I don’t believe that the oil rally is based on fundamentals but more so on unstable events in the Middle East. Therefore this elevated level of energy prices could be temporary so I would like to guard against a potential let down which could drag HAL stock down with it.
Furthermore, by using Hal options I don’t even need a rally to profit. If one comes my prophets come faster. But with my trade setup, I merely need HAL to stay above my risk level and I retain my maximum gains. If price falls below my puts, then I would own shares at a big discount from today’s prices.
Given the value of the company, that would be a scenario that I can manage to profitability.
Haliburton Stock Trade Ideas
The Bet: Sell the HAL Jan 2019 $40 naked put for $1.10. This is a bullish trade where I have a 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $38.90.
Selling naked puts carries big risk especially for a stock as expensive and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the HAL Jan 2019 $40/$38 credit put spread. The spread has the same odds but would deliver 15% yield on risk. Neither trade require a rally to profit.
Since there are no guarantees when investing in stocks, I never risk more than I can afford 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 as @racernic on twitter and stocktwits.