This week got off to an exciting, if frightening, start because of oil’s massive price drop, and while prices are recovering, I want to take advantage of further weakness in the sector with a put debit spread on ConocoPhillips (NYSE:COP).
As you may know, U.S. stock prices slipped on Monday and Tuesday because oil futures suffered a tremendous drop.
Oil futures dipped briefly into negative territory on Monday, and prices started higher on Tuesday before dropping again, albeit not as far.
The energy sector is weak, and even as prices stabilize, demand for oil remains low.
This Sudden Drop Wasn’t So Sudden
At the beginning of April, analysts at Goldman Sachs warned the COVID-19 outbreak could push crude prices into negative territory. They were right.
And last Friday marked the seventh negative week in the past eight weeks for crude oil futures.
The Organization of Petroleum Exporting Countries and Russia (OPEC+) are putting production cuts into place, but according to one analyst, the cuts are only expected to help oil find a bottom in May if more countries start to reopen.
That implies there is still more downside ahead, and many oil companies could continue falling if that’s the case.
COP is Losing Steam
If you look at the chart below, you can see that COP ran into resistance at around $38 before heading lower. The stock had been making higher lows since mid-March, but that trend started to level off once resistance came into play.
Daily Chart of ConocoPhillips (COP) — Chart Source: TradingView
Industry experts have said it’s going to be “survival of the fittest” for oil companies. I’m not predicting bankruptcy for any particular companies — though COP isn’t exactly the weakest of all the exploration and production companies — but the industry is struggling like almost every other sector.
Because that isn’t likely to change soon, I am recommending a bearish put debit spread.
Using a spread order, buy to open the COP June 19th $31 put and sell to open the COP June 19th $26 put for a net debit of about $1.55.
Note: Be sure you are opening the monthly COP options that expire on Friday, June 19, 2020.
About Put Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this put debit spread is a way to lower the cost of buying bearish put options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.