2 Energy Stocks With Cheap Pre-Earnings Options

NRG and SU stocks could be primed for a profitable options play

by Karee Venema

Published on Apr 18, 2018 at 12:37 PM
Updated on Jun 24, 2020 at 10:16 AM

We're heading into the heart of earnings season, which could create several potentially profitable trading opportunities. Among those getting ready to unveil their quarterly results are oil-and-gas names NRG Energy Inc (NYSE:NRG) and Suncor Energy Inc. (NYSE:SU). Both energy stocks have exceeded options traders' volatility expectations over the past year, and with short-term implied volatilities relatively low right now, it could be a prime time for pre-earnings premium buyers to strike.

NRG Energy Stock Has a Recent History of Positive Earnings Reactions

NRG Energy is slated to report first-quarter earnings before the market opens on Thursday, May 3. The stock has averaged a next-day gain of 4.3% after the company's last two quarterly events -- in line with the stock's average one-day move over the past eight quarters, regardless of direction.

The equity's trend is certainly to the upside right now, up 71% year-over year. More recently, NRG stock has added 1.5% to trade at $31.72, and hit a three-year high of $31.78 earlier amid surging oil prices.

Monthly May options are remarkably cheap right now, per the stock's Schaeffer's Volatility Index (SVI) of 32% -- in the 9th annual percentile -- which could make it easier to maximize the benefits of leverage. Plus, NRG's Schaeffer's Volatility Scorecard (SVS) is docked at a lofty 92 (out of a possible 100), meaning the equity has tended to make outsized moves over the last 12 months, relative to what the options market has priced in.

Suncor Energy Stock is Trading Near New Highs Ahead of Earnings

Suncor Energy will report first-quarter earnings after the market closes next Tuesday, April 24. Despite suffering a 3% post-earnings loss back in February, the stock has a history of positive earnings reactions -- closing higher the next day in six of the past eight quarters, averaging a gain of 2.2%.

SU stock had a rough start to 2018, but since bouncing from the $31.50-$32.00 region in early March -- a 38.2% Fibonacci retracement to its rally in the second half of 2017 -- it has gained 22.3% to trade at $38.48. What's more, the shares topped out at $38.58 earlier today, their highest mark since September 2014.

And even with the uncertainty of earnings looming, SU's SVI of 25% is ranked in the 5th percentile of its 12-month range, suggesting low volatility expectations are being priced into short-term contracts. What's more, the oil stock has consistently rewarded premium buyers over the past year, per its elevated SVS reading of 92.


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