ConocoPhilips Now Offering 1823%… And You’re Gonna Turn Up Your Nose? (COP)

With the market making increasingly large intraday moves, we expect a volatility event in the coming weeks.

And what does that mean?

Essentially, that we’re about to face an uncontrollable surge on the part of the major market averages that will create liquidity outages and/or ‘spread failures’ on the trading floor.

A ‘spread failure’, for the uninitiated, is a condition that strikes infrequently.  Most often in the midst of a steep selloff, a ‘spread failure’ means traders simply cease offering a bid/ask spread on a security.

It means, in essence, that the market has broken.

We’ve heard many stories of this sort, though we’ve seen it only once, back in October, 2008.

We were looking to close and couldn’t find numbers anywhere.

They didn’t exist.

Until the selling had calmed and the market (and that particular stock) had bounced somewhat, there was nothing to do; no spreads to be seen.

And that’s not right.

With that in mind, we’re now turning to oil and gas giant ConocoPhilips (NYSE:COP) to buttress our fortunes.

Because not only is oil about to spill, but the majors, too, are headed for the tar pit.

Fundamentals

• COP sports a P/E of 15.34, with analysts expecting that to contract to just 9.66 in the coming year (forward P/E).  So, either earnings grow by 50% or price declines by a third.  Take your pick.
• Incidentally, consensus sees next year’s EPS contracting by 16.62%, so that should help you figure what kind of bomb COP is facing over the next twelve months.
• Dividend Yield is a spotty 1.53%,
• Price to Book is 2.70, and
• Insiders shucked 23.86% of their holdings in the last half year – $38 million worth (with $25 million dumped in just the last eleven weeks).

Now look at the chart –

Now, pay attention, squirt –

1. RSI is sub-waterline bearish (in green), and
2. MACD confirmed yesterday by declining below its own half-way waterline.  That means we could see strong selling as early as today’s open.
3. Price broke below a five month trend channel one week ago (in red), and has since rebounded somewhat.  Upside, however, is limited (see #5).
4. The gap at 96 (in blue) may have to be filled before we continue the decline – or not; it’s impossible to say.  But if it is the case, then a’cover it will… before declining steeply thereafter.  If not, expect the gap to be filled in the months ahead.
5. The short-term MA is now rolling over, putting a lid on price at 100 (and declining).
6. Support arrives with the rising 137 DMA at 85.  And that’s the likely next destination for COP stock.
7. We note, too, a severe curtailment of volume (in black), which augurs ill for the shares.  “Volume precedes price.”

So…

A Jew and His Gold recommends you consider selling the COP May 20^th 91/96 CALL spread* for a credit of $2.05 (5.35/3.30) and buying the COP May 20^th 93/88 PUT spread** for $2.31 (4.80/2.49).  Total debit on the trade is $0.26.

[*Sell the 91 CALL and buy the 96 CALL.  **Buy the 93 PUT and sell the 88 PUT.]

Rationale: for $0.26 we buy the opportunity to make $4.74 NET.  That’s 1823%.

Max loss is $5.26 (difference between the CALL strikes plus the initial credit).

Time is a consideration.  Expiry is in three weeks; not the usual duration we allot to our trades.  That said, COP looks wobbly and ready to spill at any moment.  Go further out if you need to buy more time.

Our breakeven arrives at $91.74, just 1.4% below the stock’s current price.

Full profits (1823%) are achieved with a decline of just 5.4%.

This looks like a swim in the pond, folks.

Barring any unforeseen oil slick.

.ה’ מלך. ה’ מלך. ה’ ימלוך לעולם ועד

Many happy returns,

Matt McAbby

Follow @HughLOHaynew