ConocoPhillips (COP) is caught in the middle of the global economic turmoil that has greatly affected the price of the stock. ConocoPhillips' value has been dropping since its peak of $58.50 in early March. Presently, it trades at $52.25 and may not be done declining yet. What is happening with the industry? Does it provide an opportunity for us to make some money?
Europe and Oil Stock Prices
As they continue to fester and escalate, economic problems in the eurozone are having a negative impact on oil stocks. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has dropped more than 10 percent over the last month, as concerns of Europe's economic uncertainty continue to grow.
Adding to this, we have had a significant drop in oil prices. On March 25, the price of oil was at $90.90 a barrel, while Suncor Energy Inc. (SU) posted that the price of oil in the first quarter of this year averaged $102.95. Ralph Glass, director of energy valuations and operations at AJM Deloitte, anticipates oil prices to stay around $90 per barrel.
"It is going to be there for a while until we see some kind of economic stability in Europe."
The European Union is the second largest oil consumer on the planet. For this reason, it is highly likely we are going to see a continued stall in oil & gas company stock prices over the next quarter at least.
Analysts like Merrill Lynch and Brian Belski are downgrading energy stocks. They are also expecting oil and natural gas producers to underperform the broader market in the coming months because of falling prices and growing inventories. We have already been receiving reports suggesting economic expansion will continue to weaken; this is continuing to add to the upheaval in oil and gas stock prices.
While the outlook continues to look bearish for at least another quarter, this provides us with a couple of different short-term income strategies to consider, while the economy attempts to recover and Europe struggles to stabilize.
The Options Play
- Buy the July 2012 call with a strike of '52.50' (priced at $1.70)
- Sell the July 2012 call with a strike of '55.00' (priced at $0.65)
- Net Debit to Start: $1.05
- Maximum Profit: $1.95
Reasoning behind the Trade
- Though we are not bullish on the stock, we do believe it will provide a few bullish "peaking" moves and this will give us an opportunity to take advantage of some of them.
- We do not expect the full range of this play to take place because the '55' level might be too high. Reversing the position after the stock reaches $52.50 might be a better way to play this.
Second Options Play
- Buy a straight put option. An August 2012 put with a strike of '50' (priced at $1.88)
We do not expect the stock to stop dropping just yet. However, since it is slow moving, this time decay protection will provide a cushion against a rise in the price of the stock before it moves down again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.