Shares of ConocoPhillips traded more than 6% lower Monday afternoon. The move set off a sell signal as ConocoPhillips stock also gapped down sharply through its 50-day moving average.
After showing strength earlier this year, this has been ConocoPhillips' largest three-day decline since June of 2020, and is on track for the largest single-day move lower since November of that same year, according to Dow Jones Market Data.
For investors who expect further weakness or neutral trading below the 50-day moving average — which should now act as resistance — selling a call option can generate a nice premium so long as shares stay below a certain price.
Using a Short Call Option To Express Bearish View
In the case of ConocoPhillips stock, investors can consider selling a June 17 expiration, $100-strike call. This call option has a delta of 26, which equates to being short 26 shares of ConocoPhillips on inception.
By selling this call, investors collect a premium of $2.20. This equates to a maximum gain of $220 that would be realized if shares of ConocoPhillips remain below 100 on June 17. The trade has a break-even price of $102.20.
If ConocoPhillips stock continues lower or trades neutral to slightly higher, investors will experience a full profit on the trade. However a large move higher leaves the potential for uncapped losses. To negate this risk investors can take a loss by buying back the call option at three times the credit received, for a maximum loss of $720 if the trade moves against them. While taking a loss is unappealing, it negates the risk of a large unforeseen tail event.
Volatility Elevated In Energy Sector
The June 17 100 call is currently trading at an implied volatility of 43%, while the stock has a 30-day realized volatility of 39%, which appears expensive. While the geopolitical conflict over Ukraine and growth concerns will lead to further volatility in crude oil and therefore ConocoPhillips, expecting the stock to realize significantly more volatility than the turbulent prior month seems unlikely.
Of note, ConocoPhillips will report its first-quarter earnings on May 5. Analysts expect EPS of $3.14 with an EBITDA of $8.45 billion. While earnings could lead to an added source of volatility, past earnings moves have been modest, with an average move of only 1.8% in ConocoPhillips stock.
Due to ConocoPhillips' high correlation to energy prices, investors wanting to take this trade should either have a bearish view on the energy sector or have other bullish positions in energy names that could hedge against potential losses in this option position.
Despite the sell signal, ConocoPhillips stock still has strong fundamentals, with a top IBD Composite Rating of 99.
