Option Trade Of The Week: Apache Corp. (NYSE: APA)
Energy and oil service stocks have been rallying over the last few months, but the gains within the groups have varied quite a bit.
Exploration and production companies, as well as oil equipment companies, have performed better on average than the pipeline companies.[hana-code-insert name=’adsense-article’ /]The sentiment toward the entire energy sector has gotten overly optimistic in recent weeks and I wouldn’t be surprised to see oil prices slip a little in the coming month.
That being said, I was scrolling through the charts from my bearish scan last night when I took note of the chart for Apache, an oil and gas exploration company.
What I noticed was the trend channel that has dictated trading over the last nine months and how the stock is hitting the upper rail.
We also see that the daily stochastic readings for APA are in overbought territory.
I also looked at the overall sentiment toward Apache and what I saw was that on December 21, the sentiment reading was in the top five percentile readings for the past year, meaning extreme optimism toward the stock. Historically high or optimistic extremes in sentiment have marked tops for the stock.
Buy to open, the Feb18, 47.50 strike puts on APA. These options expire on February 16. Based on previous declines and the previous instances where the sentiment readings were high, this should be sufficient time for a dip in the stock and the dip should range between 12% and 20%.
The option closed with an ask price of $4.50 on Tuesday and you should be able to get in to the trade at $4.70 or less. A decline to $38.50 would make this option worth at least $9.00 (for a potential 90%-plus return) based on the intrinsic value. So your target should be for the stock to reach $38.50 and I would recommend a stop-loss point at $46.25.
— Rick Pendergraft
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