PXD has been in a horizontal range since the better part of September. Earnings hasn’t even moved the stock out of its barcode-type pattern. If nothing is going to move this stock, one might as well play along with the trend. The upside to this range has been $110 and the downside, again, has been $101. There are many potential ways to trade this range.
One could simply flip long and short equity deltas around, selling the top and buying the bottom, but trading the stock ties up a lot of cash. Another way one could trade this range could be from getting long theta. This would put the probabilities into the favor of the option seller, for it is estimated that nearly 80% of all options expire ‘out of the money.”
Selling an iron condor would be a way to play this range. The short strikes could be around the aforementioned price levels. One could wait until the stock is equidistant from the two levels or leg into the trade, however being net short vega may not be a good idea going into the fiscal cliff. These support levels will get thrown out of the window if Washington does not get their act together.
A little fundamental analysis never killed anyone. PXD is an oil and gas E&P (exploration and production) firm. They are vertically integrated, meaning they enjoy cost savings from overlapping operating efficiencies These include, but are not limited to service equipment and people. Citi recently initiated coverage with a ‘buy’ rating and issued a $120 price target. The $120 level is vey significant, for it represents the all time high in the stock. PXD is 17% away from the all time high. PXD’s 100-day moving average recently crossed over the 200-day moving average too. This horizontal action may be setting up PXD for its next big move, up or down, but until then, one may employ a plethora of strategies to take advantage of the choppy action.
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Author: salernoma@mx.lakeforest.edu
