Shares of Chevron Corporation (NYSE:CVX) have been on a monster rally over the last month. CVX stock has rallied some 15% since making a low around the $112 level in early April. While undoubtedly some of the move higher is attributable to the rise in oil, I think Chevron has reached a short-term top and will likely retrace some of the recent strong gains in the coming weeks.
As the two largest U.S. oil stocks, Exxon Mobil Corporation (NYSE:XOM) and Chevron are usually highly correlated. That correlation is breaking down big time lately, as CVX has dramatically outperformed XOM. In fact, CVX stock is currently at largest comparative differential over the past five years to Exxon. Expect a reversion to the mean in the near future, with Chevron being a relative underperformer.
Chevron Stock Charts
CVX stock is now trading at a large premium (over 10 points) to the 50-day moving average of $118.40. Previous forays this far above the average invariably have resolved themselves with a pullback. I expect the same to happen again this time as CVX retraces some of the recent strong gains.
CVX also had a bearish reversal day yesterday. Shares gapped higher and traded above the $130 level for a while, only to reverse course and close well off the highs of the day. This shooting star candlestick pattern is indicative of a short-term top in the stock. It is a sign that the buyers have become exhausted, especially after such a strong rally in Chevron.
Chevron options are getting cheap. Implied volatility (IV) now stands at the 35th percentile, which favors long volatility strategies when constructing trades. CVX options also pointed to some decided overexuberance yesterday, as nearly 42,000 calls versus only 13,000 puts changed hands. Bullish option sentiment this lopsided it is usually a reliable contrarian indicator that the buying may have reached a crescendo.
So with CVX stock looking overbought and options looking cheap, a put calendar spread makes intuitive sense.
CVX Stock Trade Idea
Buy CVX June $125 puts and sell CVX May $125 puts for a $1.30 net debit.
Maximum risk on the trade is $130 per spread. Ideally CVX stock closes near the $125 level at May expiration to realize the maximum potential gain. The trade is 10 deltas net short at inception, which equates to being short 10 shares of stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
