Q2 STOCKS TO BUY

Oil Bears: Smart Money, or Contrarian Signal?

What heavy put volume on the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) means for contrarians

Oct 31, 2014 at 8:53 AM
facebook X logo linkedin


Even though the market has recovered most of its gains, oil really has not. The rolling crude near-ish future (now December) peaked at $107.68 in late June, and then dropped to just under $80 by mid-October. It bottomed at $79.44 on Monday, and is still hovering near $80.

And, all that punk action has of course transferred into stocks in the industry, and lately has sparked a flood of put trading. This, via Bloomberg:

Even after valuations for an index tracking the shares slumped 40 percent, investors are loading up on bearish options. The cost of puts on the SPDR S&P Oil & Gas Exploration & Production ETF jumped to the the [sic] highest level in seven years versus calls. The exchange-traded fund tracks companies including Exxon Mobil Corp., Chevron Corp. and ConocoPhillips, which are down more than 9 percent from their highs this year.

… Companies in the index that the oil ETF (XOP) tracks trade at 26.6 times reported earnings, data compiled by Bloomberg show. Multiples fell as much as 39 percent from June to a one-year low on Oct. 14. The benchmark Standard & Poor's 500 Index has a valuation of 17.6 times.

Both volume and the number of options outstanding on the oil ETF surged this month, and nine out of the 10 most-owned contracts are bearish. Those hedging against a 10 percent decline in the fund cost 10.7 points more than calls betting on a 10 percent gain on Oct. 28, according to three-month implied-volatility data compiled by Bloomberg. That's the widest spread since September 2007.

On the surface, it sounds bullish, from a contrarian basis. It's an old saying that you want to get greedy when others are fearful, and there sure is plenty of fear around.

Implied volatility in the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) did make quite the move, as well. The XOP "VIX" was as low as 21 in late August, then peaked as high as 58 in mid-October. Then again, that's pretty much in line with the percentage move in the actual CBOE Volatility Index (VIX). Unlike the actual VIX, though, XOP volatility has only dropped back to the low 40s.

One warning, though: Be careful deriving too much signal when options are telling you the same story as the stocks themselves. If we saw all this put interest while the energy patch was booming, it would tell me that no one believes in the boom, and the public at large is trying to catch a top. That rarely works in the aggregate. But, a spike in put interest in a weak group? That makes some sense.

Now, don't get me wrong: I'm not saying that action is bearish. It's not likely "sharps" are loading up on puts now. It's just that it's a weak bullish signal.

It is interesting that XOP has recovered better than crude itself. It bottomed at $52.15 in mid-October, about when crude was first hitting lows. It has since popped to the mid-$59s. So, maybe the masses already have backed up the volatility truck at the bottom? If nothing else, it's a level to lean against.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

 
 

“Buy This Stock Now!” - Expert Who Called 11x On TSLA

He called a rare 11x on Tesla…

But now, thanks to Elon & Trump’s new alliance…

He says there’s a new opportunity that could be 1,000x BIGGER than Tesla – and it could completely revolutionize a $23 Trillion market.

It’s trading for less than $5 per share right now…

But it won’t be under the radar for long.

Discover The 1,000x Bigger Elon Opportunity Here

GRAND SLAM COUNTDOWN

 
 

Featured Articles from Trusted Partners:

👀Learn How Dividends Create Passive Income for Life
Receive $200 Off Motley Fool Epic. The Motley Fool Epic $299 discounted offer is based on $499/year list price. Introductory promotion for new members only. Take control of your money and your portfolio with Motley Fool Epic.

💵New Income System Could Pay You $4,243 Monthly
You could collect an average of $4,243 per month starting as early as next week with a new payout system for income investors. New registrations are being accepted for investors who want to be in a position to start with their first payout next week.

🚀Easy 92% Crypto Dividends (No Coins Required)
COIN stock doesn't pay a dividend... But there's actually a new way to collect a massive dividend that's indirectly based on the stock and offers a terrific monthly income (currently yielding nearly 92% on a forward basis).

🤝Free Advisor Match with Wiseradvisor.com
Don't leave your retirement to chance! Get matched with a trusted financial expert for FREE and make the most of your tax refund. Get started now.

⚠️Dennis Quaid's #1 Warning for Americans
Here's the thing: life doesn't come with guarantees. The economy shifts, markets stumble, and years of hard work could slip through your fingers like sand. But it doesn't have to be that way for you. So request a free copy of this Gold & Silver Guide that will arrive right to your doorstep when you act now.

 

 
 

Follow us on X, Follow us on Twitter