2 Contrarian Options Opportunities on Oil

OIH and TSO appear set for near-term gains

Feb 2, 2017 at 3:36 PM
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While crude oil prices haven't made many outsized moves in either direction of late, it could be an attractive time for options traders to make plays within the sector. Both the VanEck Vectors Oil Services ETF (OIH) -- an exchange-traded fund tracking the oil services sector -- and petroleum stock Tesoro Corporation (NYSE:TSO) appear to be positioned for near-term gains. Plus, both OIH and TSO are presenting prime options-buying opportunities at the moment.

Oil currently tops our internal Sector Scorecard, which ranks sectors based on their bullish contrarian setups. Within the sector, 70% of the 27 components we track under the "oil service" umbrella are above their 80-day moving averages, and yet analyst "buy" ratings stand at just 37%. Plus, the median short-interest ratio is 5.63, representing more than a week's worth of buying power.

Representing the sector, OIH is up 40.4% year-over-year, and seems to have found a layer of support in the $33 region, which corresponds to a 50% gain from its 2016 closing low. The shares are currently flirting with the year-to-date breakeven level, down 0.3% at $33.27 this afternoon. The ETF could be set for a solid month, as February has historically brought the second-highest monthly returns for OIH, behind April, with the shares averaging a 3% gain -- among the highest of any major index or ETF, per a recent study run by Schaeffer's Quantitative Analyst Chris Prybal.

Despite this technical backdrop, options players have been targeting OIH puts over calls at an unusual rate of late. The ETF's Schaeffer's put/call open interest ratio (SOIR) of 1.74, for instance, shows put open interest nearly doubling call open interest among options set to expire in the next three months. Plus, this ratio ranks higher than 90% of the past year's readings. It appears to be a prime time to buy OIH's short-term options, too. With a Schaeffer's Volatility Index (SVI) of 23% and a 30-day at-the-money implied volatility of 25.1% -- in the 8th and 6th percentiles of their respective annual ranges -- VanEck Vectors Oil Services ETF's (OIH) near-term options are currently well priced, from a volatility perspective.

Narrowing in on an individual stock, TSO is setting up quite the enticing opportunity for option bulls, as well. The company is due to report earnings after the close next Monday, yet short-term options are pricing in surprisingly muted volatility expectations at the moment, per the equity's SVI of 35% -- in the low 21st annual percentile. Nonetheless, it appears some options traders have been hoping to cash in on a post-earnings volatility crush, as call selling has been a popular strategy, with 3.7 TSO calls sold to open for each one bought over the past 10 days.

Elsewhere, sentiment toward TSO appears mostly upbeat. In fact, call buying has also been plenty popular, per the stock's 10-day call/put volume ratio of 3.47 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) -- just 9 percentage points from an annual bullish high. Analysts are optimistic, too, with nine out of 14 calling TSO a "strong buy," and not one handing out a "sell" recommendation. That doesn't mean there's no buying power left, however. Short interest on TSO jumped nearly 23% in the most recent reporting period and is now seated at its highest level since early 2015, representing about 9% of the security's total float.

Technically, TSO is up just 3.7% over the past 12 months, at $82.18 -- including a rise of 1.5% today following an upgrade to "overweight" at J.P. Morgan Securities -- but the stock could still be in a good position to take off. The shares pulled back to both the 160- and 200-day moving averages earlier this week, both of which are historically bullish signals for TSO.

According to Schaeffer's Senior Quantitative Analyst Rocky White, the stock has pulled back to the 160-day trendline eight times in the last three years. After such a signal, TSO saw an average five-day return of 5.4%, positive 88% of the time. At 21 days, the shares have added an average of 10.6%, and were positive 86% of the time. A pullback to the 200-day moving average has been equally promising for Tesoro Corporation (NYSE:TSO). This signal has yielded an average five-day return of 7.6%, with an 83% rate of positive returns. And the stock has tacked on 11.6% after 21 days, positive 80% of the time, based on six previous occurrences in three years.

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