Concho Resources Puts Could Be Profitable Trading Idea

CXO stock seems overdue for bear notes

Sep 12, 2019 at 11:58 AM
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Oil prices are headed south today, after Saudi Arabia's new energy minister said the Organization of the Petroleum Exporting Countries (OPEC) would not discuss stiffer cuts to crude production ahead of its December meeting. This is turning up the heat on energy stocks, with the shares of Concho Resources Inc (NYSE:CXO) trading down 3.7% at $72.05. CXO stock could be headed even lower, if history is any guide, and could make an attractive target for options bears.

Taking a quick step back, the shares of the Texas-based oil name hit a seven-year low of $63.92 on Aug. 7. A choppy rebound off this region brought the stock up to its 40-day moving average, which has proven to act as resistance over the past three years. In the four other times CXO ran up to this trendline over this time frame, the equity was down 7.6%, on average, one month out, with 75% of the returns negative, per data from Schaeffer's Senior Quantitative Analyst Rocky White.

What's more, Concho Resources stock's Schaeffer's Volatility Index (SVI) of 43% is perched near its two-year average of 33.5%. White's modeling shows that an at-the-money CXO put option could potentially return 169% over the next two weeks on another expected rejection from its 40-day moving average.

There's plenty of optimism to be unwound on the outperforming stock, which could send the shares even lower. Despite CXO's 30% year-to-date deficit, 23 of 25 analysts maintain a "buy" or better rating on the equity. Plus, the average 12-month price target of $116.69 is a 62% premium to current trading levels. Downgrades and/or price-target cuts could create headwinds for the stock.

More short selling could create pressure on Concho Resources stock, too. Short interest jumped 9% in the most recent reporting period to 8.38 million shares. These pessimistic positions represent just 5.7% of the security's available float, though, meaning the bearish bandwagon is far from full.

cxo stock daily price chart on sept 12


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