Chevron (CVX), like all oil companies as of late, has been hard hit by slumping oil prices. As oil stocks are expected to continue down because of earnings, this move is reinforced by a pessimistic view of third quarter earnings as a whole. With nothing to change the outlook or sentiment of the market, we can take advantage of this with a short term income strategy as well as long term investments in our stocks.
UBS Analysts are not favorable toward earnings for integrated oil companies in the U.S. when compared with year over year earnings. They are predicting a 16% decline and that is not good. Production should be down by around 2% and renewed optimism is a rare commodity for the industry right now. Investors aren't expecting much and that is about what they will get to, so do not look for any strong catalyst to turn things around.
It hasn't helped that crude oil supplies have continued to surge.
On top of this, we have learned that the two decade lawsuit against Chevron by Andes villagers took a financial turn against the oil giant as Andres courts allowed the plaintiffs to seize $200 million with of assets that included $96.3 million the government of Ecuador owed the oil company. I am sure the financial jockeying is no where near over, but it definitely ties up capital the company could use.
Let's face it, the news hasn't been good and continues to erode. It was just two weeks ago that Chevron announced its downsized earnings forecast stating crude prices will be weaker and watching the dollar go up will bearish on the industry. The global economy continues to erode the demand for energy. With the overall expectations of a bearish earnings the third quarter, I see very little reason to give the stock anything but a bearish forecast.
After its peak in mid September, Chevron moved sideways through the first week of October and started moving down after that. It started with a huge gap down and this push up never recovered. The RSI indicator has been consistently moving down since the stock has formed two bearish peaks on its way down. It looks like it finally broke through the 50 day MA and may be using the middle Bollinger Band as resistance. If this is the case, we have the beginnings of a very big move down. It has already pushed through the bottom bands twice. I observe the same support from the MACD. The stock definitely looks like it is moving down. I will be interested to see if the stock uses the 50 day MA as resistance.
The Option Play
The stock is presently trading at 111.18 and I must lean to the bearish side if I am looking for a short term income play, there is just nothing out there to cause the stock to change direction.
- Buy the January 2013 put with a strike of '110' (priced at $3.75)
- Sell the January 2013 put with a strike of '105' (priced at $1.99)
- Net Debit to Start: $1.76
- Maximum Profit: $3.01
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Trade with the trend.
- Analysts see no catalyst tot urn the industry around in the third quarter.
- Lower earnings expectations for Chevron and whole industry.