The Historical Case For Buying Short-Term NRG Energy Inc (NRG) Put Options

NRG Energy Inc (NRG) could slump after Inauguration Day, if past is precedent

Jan 19, 2017 at 3:14 PM
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As with this casino stock, bullish options traders should be wary of NRG Energy Inc (NYSE:NRG) heading into tomorrow's presidential inauguration of Donald Trump. The stock is one of the worst performing S&P 500 Index (SPX) components in the week subsequent to inaugurations. Specifically, the shares have finished lower in each week following the past three ceremonies, shedding 2.2%, on average -- unlike these two outperforming oil stocks.

Today, NRG is managing to buck the broad-market headwinds, up 0.5% at $15.33. And, since Trump's election to the presidency, the stock has been on fire, tacking on 33.7%. Earlier this week, in fact, the shares hit a six-month high of $15.92.

That said, NRG is sitting in the proverbial danger zone. Given its 14-day Relative Strength Index (RSI) of 79.4, the stock is in overbought territory, suggesting a near-term pullback could be in the cards. This, coupled with the equity's historic post-inauguration struggles, could lead to a wave of selling in the sessions ahead.

If that happens, a capitulation among the bulls could exacerbate losses. For example, there's plenty of room for future downgrades, considering five analysts rate NRG a "strong buy," compared to three "holds" and not a single "sell." Similarly, short sellers have been hitting the bricks en masse, with short interest down 34% in the most recent reporting period. If the shares pull back, however, these short sellers could be reinvigorated.

Based on the considerations above, it may be a good time to buy put options on NRG Energy Inc (NYSE:NRG). Adding to the appeal of options buying -- whether puts or calls -- is the fact that volatility expectations are relatively low among short-term strikes. Specifically, the stock's Schaeffer's Volatility Index (SVI) of 42% sits in the bottom one-tenth of all readings from the last year.

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