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Morning Update

This morning jobless claims were released due to the holiday and were in line with expectations at 410K. Last week’s claims were revised up from 439K to 451K. The Euro was volatile overnight, first falling on news that no agreement over Greek aid disbursement have been reached. However since then the Euro has traded all the way back and is now up on the day. Today’s US trading session is likely to see light volume ahead of the holiday.

Yesterday I noticed unusual options activity in Halliburton. One trader bought 3827 December 30 puts for $0.54 with the stock at 31.35. This is a bearish bet that will profit if HAL is below 29.46 (6% lower) at December expiration in 30 days. Halliburton is a high beta stock that was down over 20% from its September highs before rebounding a few percent with the broad market this week. This trader is taking advantage of this bounce to get bearish exposure to the stock, and also take advantage relatively low implied volatility. Thirty day implied volatility in HAL is currently 27.32, which is near the bottom end of its 52-week range of 25.13 – 60.80. If HAL sells off like this trader expects, implied volatility will increase as investors rush to buy puts to protect their stock positions pushing the price of these puts up even more.

Right now Halliburton’s technicals are bearish. The stock made a head-and-shoulders top on its daily chart over the last few months. This price pattern would suggest the stock trades down to 28.00, which also coincides with previous area of major support and is near the stock’s 52-week low. Fundamentally, the stock also faces some headwinds. During the company’s last earnings report David Leasar, the company’s chairman, president, and CEO, said “We expect the next couple of quarters to be pretty bumpy.” That’s because of price volatility in guar gum, a key material used in hydraulic fracturing led Halliburton to hedge at an unfavorable price which has left them stock with huge amounts of overpriced investory. Another reason is that Halliburton’s North American customers are cutting back spending due to high costs and low energy prices. Relative to the third quarter of 2011 there are 6.5% fewer rigs in North America, which means fewer customers for Halliburton. Halliburton’s international operations remain strong, but may not be stellar enough to drive substantial growth going forward.

I like this trade for playing a near-term sell off in the stock because it has a very favorable risk-reward ratio. If Halliburton does trade down to 28, this option will return $1.46 in profit, but can only loose $0.54 in the event that scenario does not play out.


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