APC Options Bears Won Big as Stock Spiraled

Rising short interest levels and bearish analyst notes put pressure on APC

by Lillian Currens

Published on Feb 25, 2019 at 1:27 PM

Subscribers to Schaeffer's PowerTrend service doubled their money with the Anadarko Petroleum Company (NYSE:APC) February 57.50 put. Here's a quick look at why we expected a big move lower from the oil stock, and how the profitable options trade unfolded.

At the time of our recommendation on Thursday, Nov. 1, APC had just experienced a bearish outside day, or engulfing pattern, on the heels of the company's Oct. 30 earnings miss. This bearish signal occurs when the security's price action engulfs the previous day's movement, and the stock closes near its lows of the day.

Plus, just days before APC reported its third-quarter earnings, the equity fell beneath the 320-day moving average. A previous break of this trendline in the second quarter of 2017 resulted in a sharp, steady decline for the security.

Downgrades were a possibility, too. At the time of our recommendation, 16 out of 21 analysts had given the equity a "strong buy" rating, with not a single "sell" on the books, despite the security barely topping its year-to-date and year-over-year breakeven levels. 

Short interest had been rapidly decreasing, as well, with only 11 million shares sold short, compared to the 30 million-share peak that occurred ahead of the stock's March- July rally. However, we thought the negative earnings reaction may embolden shorts to target APC, which could be a catalyst for additional headwinds. 

In the wake of our recommendation, APC stock unsuccessfully tested its 320-day moving average, before embarking on its next leg lower. Broad-market headwinds and rising short interest levels -- these bearish bets topped 12 million shares in mid-December -- put pressure on the security, which panned annual lows in late December -- allowing us to close half our position on Dec. 24.

These technical troubles only continued into 2019, sparked by several bearish brokerage notes, including a number of price-target cuts following the company's early February fourth-quarter profit miss. Ahead of expiration on Friday, Feb. 15, we closed the remainder of the trade when APC was trading at $44.89, locking in a net profit of 131%.

apc stock daily price chart feb 22

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