Anadarko Petroleum Put Buyers Turn a 200% Profit

APC stock has struggled since February, with the negative price action exacerbated by a post-earnings bear gap

May 4, 2017 at 4:43 PM
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Subscribers to Schaeffer's PowerTrend series recently pocketed a 200% net profit after closing out of Anadarko Petroleum Corporation (NYSE:APC) May 70 puts earlier this week. Here's a quick rundown on how APC stock came across our bearish radar after the oil exploration company reported earnings after the close on Tuesday, Jan. 31.

Specifically, we recommended buying to open the put options on Feb. 1, when APC stock was trading near $68 -- having carved out a bearish earnings reversal candle at several key areas of resistance. Specifically:

  • $70: double APC's 2016 closing low
  • $69.64: 61.8% of the stock's all-time closing high
  • $72.87: a 50% return to APC's 2015 close
  • $70.83: a 50% Fibonacci retracement of the 2014 high and 2016 low
We also noticed a potential earnings bearish outside day -- a pattern we had recently had success with on Diamond Offshore Drilling Inc (NYSE:DO) puts. Plus, APC stock failed at the put-heavy February 70 strike, while huge call open interest at the February 75 strike created the potential for options-related resistance. On the downside, puts in the February series were stacked all the way down to $57.50 -- creating a possible magnet for the shares, similar to the DO setup. 

Nevertheless, there were high expectations levied toward APC stock, which could put pressure on the stock as the optimism unwound. For starters, Commitment of Traders (CoT) data showed large speculators were very bullish on oil. Additionally, of the 24 analysts covering the shares, 18 maintained a "buy" or "strong buy" rating, meaning there was minimal upgrade potential -- and conversely, plenty of room for downgrades. We also noticed that shorts had been in covering mode since mid-December, but the shares remained flat -- suggesting that buyers had lost interest in APC stock.

Finally, it was a prime time to purchase premium on APC's options, considering the company had recently reported quarterly earnings. In other words, a post-earnings drop in implied volatility put the stock's Schaeffer's Volatility Index (SVI) in the low 2nd percentile of its annual range -- making APC stock options relatively cheap.

APC stock began to chart a steady path lower after we recommended the put options. This prompted us to close half the position on April 27 ahead of the company's May 2 earnings report, when APC was trading around $57. Anadarko Petroleum Corporation (NYSE:APC) gapped lower in yesterday's session on a negative earnings reaction, and after a Colorado fire department linked a deadly home explosion to one of the oil company's wells. We closed the final half of the position with the shares trading at $51.46, and an intrinsic value of 18.54.

apc stock daily price chart may 4

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