Bears Won’t Say Good-Bye to Energy Space: Options Recap

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Someone’s bracing for more bad news in one of the market’s weakest sectors.

Energy stocks, on average, have lost twice as much value as the broader S&P 500 over the last month. A combination of rising crude-oil inventories, bearish chart patterns and weakening growth in China help explain the declines.

Yesterday, a large options trader looked for more downside in a member of the sector: oil-field service provider Baker Hughes, a GE Company (BHGE). Here’s a breakdown of the activity:

  • A block of 45,000 January 27 puts was bought for $1.78.
  • At the same second, 45,000 January 23 puts were sold for $0.50.

Known as a bearish put spread, the strategy can generate leverage from the stock breaking below $27 to $23. It cost a net $1.28 to open, with the potential to earn more than 200 percent if the lower price is reached. (See our Knowledge Center.)

Baker Hughes (BHGE) with moving averages and potential support line.

BHGE rose 0.58 percent to $27.55 yesterday but has lost about 19 percent of its value in the last month. It made a low around $27 in early April, which could make some chart watchers see the risk of further downside if that level is broken.

Thursday’s session also saw blocks of about 23,000 contracts each trade in the January 31 and January 27 puts. Those were smaller than open interest, so it’s possible a winning downside trade was exited and rolled lower.

Overall options volume was more than 17 times the monthly average in BHGE, with puts outnumbering calls by a bearish 67-to-1 ratio.

Disclosure: This post is intended for educational purposes only. Options trading may not be suitable for all investors.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.