Black Friday’s Black Gold Opportunities

Hey Traders,

There’s no doubt about it …

Friday’s sell-off hit us hard …

And it was especially tough on some sectors in particular – such as reopening names like travel and entertainment.

But I want to talk about oil stocks.

Oil fell 13% on Friday … its worst trading day of 2021.

However … I think this sell-off was WAY overdone.

After all, we are still looking at a potential energy crisis in the coming months, especially with cold winter months immediately ahead of us.

First of all, let’s go over a few key developments in the oil sector …

Last week, President Biden announced the release of 50 million barrels of oil from the Strategic Petroleum Reserve to combat the surging demand that has bolstered oil prices in recent months.

Investors are also looking ahead to the upcoming OPEC meeting, where oil producers will decide whether they want to maintain current output levels. Originally slated for Tuesday, the meeting has been pushed back to Wednesday and Thursday to give OPEC members time to digest the recent plunge in oil prices, and further evaluate the best course of action to take.

And of course, we have Friday’s sell-off.

The S&P 500 (Ticker: SPX) and Dow Jones Industrial Average (Ticker: DJI) both fell around 2.5% on Friday.

The Energy Select Sector SPDR Fund (Ticker: XLE) fell around 4%.

Personally, I think people were too quick to sell off oil names …

And I think the overselling could mean these names are now a really good value.

Chevron Corp (Ticker: CVX):

CVX actually fell less than much of the other oil names on Friday, toppling only 2.3% to close at $114.51 … really, that’s not too bad, considering the shares are fresh off all-time highs.

Chart courtesy StockCharts

It could be because this oil name is actually quite technically sound, in spite of Friday’s sell-off. CVX recently hiked its dividend to nearly 5%, and announced a multi-billion-dollar share buy-back program to be instituted next year. Its most recent earnings report beat analyst expectations, and displayed the company’s strong cash flow.

It’s not surprising then that CVX’s top open interest positions are definitely calls-skewed. The December 120-strike call holds top honors, with more than 21,000 contracts open.

Options traders have also piled into January 2022 contracts; specifically, the 125-strike, 120-strike, 115-strike, and 110-strike contracts, which have the second through fifth top open interest amounts.

Friday’s trading session didn’t see heavy call selling, indicating the pits are waiting to see the situation further develop before exiting their positions.

However, that’s not to say CVX’s pits were quiet on Friday … quite the opposite. CVX actually saw 121% of its normal trading volume, and this volume was, in fact, put-skewed, with 19,697 puts crossing the tape, compared to 18,848 calls.

Put open interest is also heavier than usual, at 105% of its typical amounts. 310,943 puts were open compared to just 283,083 call contracts.

CVX options aren’t particularly cheap right now, but I do think there is some value to be found in the pits. The aggregate implied volatility in the standard January and April expirations make me think these terms might be worth taking a closer look at.

ConocoPhillips (Ticker: COP):

COP slid 4.5% to $71.48 on Friday, selling off in line with much of the rest of the oil sector.

Chart courtesy StockCharts

Even with the 4.5% slide, the shares are still within spitting distance of their recent all-time highs. 

In the COP pits, call volume was 252% times its usual amount on Friday, but that only tells part of the story …

With 26,213 calls crossing the tape, one Big Money play in particular accounted for a good majority of this volume.

This trader bought 16,000 contracts of the December 82.5-strike calls for $0.29.

But rather than being an outright bullish call buy, it appears that this could be a close of a previous position in COP’s top open interest contract:

What’s more, three of COP’s top five open interest contracts are actually far out-of-the-money puts, suggesting these could be hedging long positions in COP, and not actually bearish.

Exxon Mobil (Ticker: XOM):

This is another name I liked ahead of Friday’s trading session, and I think that as oil recovers, XOM could shake off its 3.5% drop from Friday.

Unlike CVX and COP, XOM is not fresh off all-time highs. Before COVID, the shares were trading in the low $70’s, and their all-time top price was $74.28 reached in 2014. Meanwhile XOM closed at $61.25 on Friday, with a recent high of $65.65.

Chart courtesy StockCharts

On Friday, XOM’s pits were busier than usual, with 125% of their average volume. 

By sheer number, calls outpaced puts, with 65,661 contracts traded, compared to 52,281 puts. However, 65k call contracts in a day is about average for XOM … but the 52k puts is 181% of what XOM’s pits usually see.

In addition, put open interest is slightly higher than usual, while call open interest is slightly lower than usual. However, calls still outnumber puts 764,398 to 669,508.

So we have put-players piling in … but call holders are not selling off.

Top open interest in XOM is concentrated in the front-month December 65-strike calls, followed by the January 70-strike call, December 65-strike put, and January 60-strike and 65-strike calls.

Prior to Friday, XOM’s implied volatility (IV) was quite low, making it an attractive trade candidate, and over the last few weeks, I have liked several of the December-dated calls between $61-$65.

At this point, I don’t know that I would dive head-first into December-dated options, but I do think that as this current COVID scare develops, and as the overdone energy sell-off wanes, XOM could once again be a strong candidate for a bullish trade.

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