Options traders have been betting with extremely inflated optimism
Subscribers to Chart of the Week received this commentary on Sunday, November 3.
A new month has arrived and after an extremely volatile October that brough a slew of economic data and big-name earnings, it’s time to look at what’s ahead. An underrated storyline this week was crude prices, with West Texas Intermediate (WTI) December-dated contracts plummeting after Israel attacked Iran with an airstrike near crude production facilities. While no damage was incurred that impacted the flow of demand and output, black gold suffered a more than 6% drop on Monday, Oct. 8. Reports surfaced Friday that another attack might be imminent, however, pushing oil futures 2.3% higher by the afternoon. Despite the volatility, oil managed a 1.6% pop for October.
November may not be the best month to invest in oil stocks, though, as data from Schaeffer’s Senior Quantitative Analyst Rocky White indicates the three worst stocks to buy on the S&P 500 next month, historically going back 10 years, are in the oil sector. The oil, gas, and coal sector make up seven of the 25 spots, per the table below. The stocks with the worst average November returns are EQT (EQT), Schlumberger NV (SLB), and Coterra Energy (CTRA), with respective losses (in order) of -3.98%, -1.54%, and -3.03%. Over the past 10 years, the equities have only finished higher 20%, 30%, and 40% of the time, respectively.
Natural gas specialists EQT has been unable to recapture its late-2023 highs above $50. And despite bouncing 20% off its Aug. 5 lows at $30.02, the three-month rally is running right into its 320-day moving average. The shares are also trapped in a downward facing channel stemming from its mid-March highs. That’s a lot of uninspiring technical barriers in the way of a 7.2% 2024 deficit.
Yet options traders have been betting with extremely inflated optimism. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), EQT's 50-day call/put volume ratio of 4.30 ranks in 77th percentile of its annual range. Echoing this, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.42 sits in the lowest possible annual percentile, indicating short-term options traders have never preferred calls more in the last 12 months.
Even analysts are ripe for a round of downgrades, with 12 of 20 covering brokerages sporting a "buy" or "strong buy" coming into Friday. As soon as this bullish sentiment begins to unwind, EQT could be in for a rough winter, no matter what energy prices do.