Energy crosscurrents

On Thursday morning, offshore drilling contractor Valaris (VAL) had call volume nearly seven times its daily average—a figure that would increase to more than 10 times average later in the day:

Meanwhile, the stock was up roughly 5% in early trading, and eventually climbed nearly 14% to hit its highest level in more than a year:

Some traders who were aware of VAL’s earnings release next week (October 29) may have been inclined to see the combination of the heavy call volume and a stock rally as bullish positioning ahead of the announcement. That could very well be, but there were a couple of other pieces of information that may have tempered such an outlook.

First, while VAL’s rally was certainly strong, many energy stocks were trading to the upside on Thursday—following the lead of crude oil, which rallied more than 6% intraday in the wake of the Trump administration’s sanctions against Russia’s two-largest oil companies. In addition to the uncertainty of how much this move may impact the supply-demand picture over time, there’s also the uncertainty surrounding how long sanctions will remain in place. If they are lifted in the near future, it would hardly be surprising to see oil give back at least some of its recent upswing.

Second, VAL’s options chain showed that volume in the December $52.50 and $55 calls—the two contracts with the heaviest trading—was less than the existing open interest (OI):

So, were traders adding to positions in these contracts, or possibly taking profits on existing trades because of the big up move in the stock? (The $52.50 call hit a one-month high on Thursday, doubling in price from a day earlier.) An increase or decrease in today’s OI totals should help clarify that piece of the puzzle.

No company is an island. While every stock has unique catalysts, every stock is also part of a larger market and economy, and traders are well advised to consider these broader forces in their analysis.

Market Mover Update: As of Thursday, Marsh & McLennan (MMC) was still trading a little above its October 16 sell-off low, but it was essentially unchanged from its rebound close a day later (see “Earnings: numbers vs. words”).

Today’s earnings include: General Dynamics (GD), Gentex (GNTX), Procter & Gamble (PG).

Today’s numbers include: Consumer Price Index (CPI), new home sales (10 a.m.), consumer sentiment (10 a.m.).

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