Shares of Apache Corporation (NYSE:APA) are lower than ever before, but I think the independent energy company will find short-term support. With a bullish put write, we can take advantage of the stock’s latest move lower.
Oil prices continue to trade in the $50-$60 range and may have found support at $55. Though there was a drop at the end of November, I don’t think we’ll see prices fall back to the low levels of December 2018 in the short term.
Back and Forth Oil Prices
If you look at the chart below, you can see that oil prices dropped last Friday, giving up most of their November gains. Traders seem to believe the drop was related to the resignation of Iraq’s prime minister.
Daily Chart of Crude Oil Futures — Chart Source: TradingView
The protests against Prime Minister Adel Abdul-Mahdi were viewed as a threat to oil production, which pushed prices up. If his resignation calms protestors, production will be under less pressure, and prices may fall.
But prices jumped slightly yesterday when the Wall Street Journal reported that Saudi Arabia would push for the Organization of the Petroleum Exporting Countries (OPEC) to extend its production cuts into 2020.
There are a lot of forces acting on oil prices right now, which will likely keep prices confined to the $50-$60 range for the rest of 2019. That isn’t necessarily bad. Steady prices could keep companies like APA relatively stable, which is all we need to collect a profit from a put write.
APA Gapped Lower After a Thin Progress Report
APA reported earnings back in October, and it missed earnings per share (EPS) expectations. The company did beat revenue expectations, but this is a demanding market, and mixed reports just won’t cut it.
Yesterday, the company released an “operational update” for its first exploratory well off the shore of Suriname. The update simply stated that the drilling project that began in September had reached 6,200 meters, and after testing and evaluation, the company would modify its equipment and resume drilling in December.
Shares of APA dropped to all-time lows. After disappointing earnings, a progress report without big, positive news was just another reason for investors to push the stock lower.
Daily Chart of Apache Corporation (APA) — Chart Source: TradingView
In the chart above, you can see that the gap is substantial. The stock lost over 10% of its value because it didn’t show signs of progress with the Suriname drilling project. But I feel the move is overdone.
APA has been making lower lows since May of this year, and it showed signs of slowing down. From August through November, it even looked like the stock was slowly heading higher. This recent news has pushed it just below the bottom it formed in the summer.
In the short term, I think APA will start to fill in the gap it formed or consolidate sideways, which means this is an excellent time to sell an out-of-the-money put option.
Sell to open the APA Dec. 27th $17.50 put at about $0.37.
Note: Be sure you are opening the weekly APA options that expire on Friday, Dec. 27, 2019.
About Naked Put Writes
A naked put write is a bullish position in which you expect the price of the underlying stock to increase.
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