AI
Monday, September 04, 2006 10:38:07 PM
Drilling for Opportunities in Oil Services
Options-Trading Strategies on Oil Services Stocks
9/1/2006 12:21 PM ET
By Jocelynn Drake (jdrake@sir-inc.com)
http://www.schaeffersresearch.com/commentary/premium/bgscommentary.aspx?id=17257
August proved to be an ugly month for crude oil, as the price per barrel slipped more than seven percent. I'll admit that I'm not complaining too loudly, considering I can skip down the block and buy a gallon of unleaded gasoline at $2.46 a gallon. If we can get back below $2 per gallon, we just might witness some dancing in the streets.
But I digress. My focus today drills down on the oil-services sector, which had its technical troubles well before the price of oil started its descent. In fact, it appears that when oil prices briefly stalled in May and June before bouncing back, this group never recovered. Since mid-May, the PHLX Oil Services Index (OSX) has battled resistance at its 10-week and 20-week moving averages. During this time frame, the index has closed only one week above this duo. Furthermore, August marked the index's first monthly close below its 10-month trendline since November 2003. While the index is still sitting on a year-to-date gain of six percent, OSX has shed more than 19 percent since tagging a near-term peak in May.
Despite the group's pullback during the past few months, sentiment remains wildly bullish. According to Zacks, 74 percent of the 199 analyst ratings offered up on OSX components come in at a "buy" or better. Should Wall Street begin to shed some of its optimism and issue downgrades, this sector could come under additional selling pressure.
Drilling down a little deeper, one company that catches my bearish eye is Noble Corp. (NE: sentiment, chart, options). The security has been guided lower under its 10-week and 20-week moving averages since mid-May, creating a series of lower highs and lower lows. It also didn't help that the company reported per-share earnings on July 20 of $1.30, a penny shy of the consensus estimate. By the close of that trading session, the equity had retreated nearly six percent.
Meanwhile, investors refuse to acknowledge that the shares may be having some problems. Short interest for the security plunged 17 percent in August, resulting in a short-interest ratio that is just two times the stock's average daily trading volume. This paltry accumulation of bearish bets leaves the equity low on potential short-covering support should it succeed in drumming up a little good news.
Options speculators are also optimistic when it comes to Noble. Peak call open interest in the September series rests at the out-of-the-money 70 strike with nearly 3,600 contracts, while peak put open interest in the front-month series comes in at the 60 strike with only 2,200 contracts. In fact, call open interest among near-term options nearly doubles put open interest.
This combination of optimistic sentiment against the stock's weakening technical backdrop leaves that shares primed for a bearish play. Investors should consider the stock's January 2007 65 or 70 put.
Weatherford International (WFT: sentiment, chart, options) is in much the same boat as Noble. The stock has broken what looked to be solid support at the 45 level and is retreating under pressure from its 10-week trendline. What's more, August marked the stock's first monthly close below its 10-month moving average since May 2005.
While short sellers are jumping on the bearish train, with short interest soaring 27 percent last month, Wall Street refuses to shed its bullish stand. Zacks reports that 11 of the 15 analysts following the company rate it a "buy" or better. Any downgrades from this group could spell trouble for the shares. A January 2007 45 put would allow speculators to capture some gains on a continued pullback in the shares.
One last bearish pick from this sector arrives in the form of Baker Hughes (BHI: sentiment, chart, options). The stock has tumbled more than 21 percent from its June high and has drifted lower under its 10-day and 20-day moving averages since late July. However, I'm a little wary of this security, as it is currently testing round-number support at the 70 level.
Furthermore, options players have grown somewhat skeptical of the shares, as they have loaded up on puts. On the other hand, short sellers have yet to jump on this security. The stock's short-interest ratio sits at a meager 2.2 days to cover. Wall Street is also deeply entrenched in the bulls' camp, with 71 percent of analyst ratings a "buy." Traders should consider the stock's January 2007 70 put. However, keep a tight stop-loss price on this position in the event that it succeeds in bouncing off support at the 70 level.
Of course, there are a handful of bullish opportunities sparkling within the sector. Smith International (SII: sentiment, chart, options) is currently perched on long-term support at its 10-month moving average. Cameron International (CAM: sentiment, chart, options) is also consolidating into support at its ascending 10-month trendline, which it has not finished a month below since April 2004.
Options-Trading Strategies on Oil Services Stocks
9/1/2006 12:21 PM ET
By Jocelynn Drake (jdrake@sir-inc.com)
http://www.schaeffersresearch.com/commentary/premium/bgscommentary.aspx?id=17257
August proved to be an ugly month for crude oil, as the price per barrel slipped more than seven percent. I'll admit that I'm not complaining too loudly, considering I can skip down the block and buy a gallon of unleaded gasoline at $2.46 a gallon. If we can get back below $2 per gallon, we just might witness some dancing in the streets.
But I digress. My focus today drills down on the oil-services sector, which had its technical troubles well before the price of oil started its descent. In fact, it appears that when oil prices briefly stalled in May and June before bouncing back, this group never recovered. Since mid-May, the PHLX Oil Services Index (OSX) has battled resistance at its 10-week and 20-week moving averages. During this time frame, the index has closed only one week above this duo. Furthermore, August marked the index's first monthly close below its 10-month trendline since November 2003. While the index is still sitting on a year-to-date gain of six percent, OSX has shed more than 19 percent since tagging a near-term peak in May.
Despite the group's pullback during the past few months, sentiment remains wildly bullish. According to Zacks, 74 percent of the 199 analyst ratings offered up on OSX components come in at a "buy" or better. Should Wall Street begin to shed some of its optimism and issue downgrades, this sector could come under additional selling pressure.
Drilling down a little deeper, one company that catches my bearish eye is Noble Corp. (NE: sentiment, chart, options). The security has been guided lower under its 10-week and 20-week moving averages since mid-May, creating a series of lower highs and lower lows. It also didn't help that the company reported per-share earnings on July 20 of $1.30, a penny shy of the consensus estimate. By the close of that trading session, the equity had retreated nearly six percent.
Meanwhile, investors refuse to acknowledge that the shares may be having some problems. Short interest for the security plunged 17 percent in August, resulting in a short-interest ratio that is just two times the stock's average daily trading volume. This paltry accumulation of bearish bets leaves the equity low on potential short-covering support should it succeed in drumming up a little good news.
Options speculators are also optimistic when it comes to Noble. Peak call open interest in the September series rests at the out-of-the-money 70 strike with nearly 3,600 contracts, while peak put open interest in the front-month series comes in at the 60 strike with only 2,200 contracts. In fact, call open interest among near-term options nearly doubles put open interest.
This combination of optimistic sentiment against the stock's weakening technical backdrop leaves that shares primed for a bearish play. Investors should consider the stock's January 2007 65 or 70 put.
Weatherford International (WFT: sentiment, chart, options) is in much the same boat as Noble. The stock has broken what looked to be solid support at the 45 level and is retreating under pressure from its 10-week trendline. What's more, August marked the stock's first monthly close below its 10-month moving average since May 2005.
While short sellers are jumping on the bearish train, with short interest soaring 27 percent last month, Wall Street refuses to shed its bullish stand. Zacks reports that 11 of the 15 analysts following the company rate it a "buy" or better. Any downgrades from this group could spell trouble for the shares. A January 2007 45 put would allow speculators to capture some gains on a continued pullback in the shares.
One last bearish pick from this sector arrives in the form of Baker Hughes (BHI: sentiment, chart, options). The stock has tumbled more than 21 percent from its June high and has drifted lower under its 10-day and 20-day moving averages since late July. However, I'm a little wary of this security, as it is currently testing round-number support at the 70 level.
Furthermore, options players have grown somewhat skeptical of the shares, as they have loaded up on puts. On the other hand, short sellers have yet to jump on this security. The stock's short-interest ratio sits at a meager 2.2 days to cover. Wall Street is also deeply entrenched in the bulls' camp, with 71 percent of analyst ratings a "buy." Traders should consider the stock's January 2007 70 put. However, keep a tight stop-loss price on this position in the event that it succeeds in bouncing off support at the 70 level.
Of course, there are a handful of bullish opportunities sparkling within the sector. Smith International (SII: sentiment, chart, options) is currently perched on long-term support at its 10-month moving average. Cameron International (CAM: sentiment, chart, options) is also consolidating into support at its ascending 10-month trendline, which it has not finished a month below since April 2004.
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