Retail traders are clearly missing the upside opportunity in Chevron ( CVX ) and other integrated oil companies. In the event of a conflagration in the Middle East, the obvious potential obstacle is the Strait of Hormuz. As many pundits on the Internet insist, if Iran were to block these important waterways, many economic powerhouses would be brought to their knees.
This is the kind of narrative that promotes doom and gloom, gold mining or other ideologies. I must say that this is very attractive stuff. At the same time, there is a good chance that it is overrated.
To make a long story short, integrated oil majors do not share a direct positive correlation with fossil fuel prices – and much of the real drag comes from the refining side. While rising oil prices may be a positive for the supermajors, a more concerning statistic is the spread of crack. This ratio is the difference between the price of crude oil and the price of refined petroleum products from it (such as gasoline).
To be sure, the current crack spread is around $37, which is historically very high. It’s no surprise that refined oil prices have soared across the country due to the Iran conflict. However, industry data shows that the spread of crack is decreasing by about $7.66 per day. In other words, settlement margins compress after the initial geopolitical shock.
Where it gets a little problematic for something like CVX stock is the recent headline. Earlier on Monday, the exchange rose after President Donald Trump said the Iran war was “pretty much” over. To be honest, it’s hard to take these words seriously as the implicit messages behind the military campaign.
Nevertheless, if the market believes that some sign of stability will enter the region, betting heavily on CVX stock may not be the wisest course of action. Sure enough, it also seems like the smart money is thinking about integrated fuel.
It’s one thing to comment on an investment idea; It’s a different matter when you organize the analysis of the activities of the most complex participants in the room. The central premise behind screeners like Options Flow — which specifically focus on large block transactions likely to be placed by institutional investors — is that you can run a cotillion of power brokers.
On Monday, net trading sentiment (for large block trades) in the derivatives market fell from par to nearly $2.5 million. Admittedly, most bearish day trades are focused on credit-based calls. However, sentiment may change as smart money traders may shy away from directional high wages.
In fact, looking at the volatility skew for the May 15 date makes the sensitivity even more apparent. In fact, the skew identifies the implied volatility (IV) – or potential movement of the stock – across the strike price spectrum of a given options range.
Again, in the case of May 15, the skew curve is clearly rising in the left-hand range (to lower strike prices). This arrangement suggests that the net priority is to reduce downside risk. What makes this bias even more apparent is that towards the right-hand boundaries, the curve is relatively flat.
Using an options-focused lexicon, we would say that Smart Money Traders is not positioned for the above content. In other words, traders who are still engaged in CVX stock are aiming not to lose rather than to gain.
That being said, the lack of demand for calls could mean discounting quick strategies based on volatility. However, what worries me is the potential lack of expansion. According to Barchart Gamma Disclosure by Strike Screener, there is a gamma cluster around the $200 strike price.
Basically, if CVX stock rises to this point, traders can start selling shares of the oil giant so that Delta remains neutral. At less than 6% higher than the current position, this gap does not seem large enough to justify a heavy long exposure.
Looking at the expected move calculator, the forward spread for the May 15 expiration date is given as a land between $172.99 and $205.89. Here, too, I have reservations about the bullish narrative for Chevron stock. While the actual upside target is closer to $206, sellers will balance their books ahead of this theoretical benchmark.
With crack being released every day, I’m not sure optimism is the right call at this moment.
For those who are more aggressive, I believe there may be a logical case for a 185/180 bear put spread that expires on May 15th. If CVX stock falls below the $180 strike at expiration, the maximum payout will exceed 108%.
As of the date of publication, Josh Enomoto had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com
