Options smoke points to price-action fire
05/03/18
When a ticker shows up on the unusual options activity radar, as was the case yesterday with oil and natural gas producer Devon Energy (DVN), there’s usually a good reason. DVN showed up on LiveAction scans for overall options volume (more than four times average), heavy call options trading (six times average), and number of trades (see below).
LiveAction scan: Largest number of trades, 5/2/18. High options volume.

Source: OptionsHouse

The daily price chart below shows what all the hubbub was about. The stock popped more than 8% yesterday after its Q1 earnings announcement, breaking out of a short-term consolidation to its highest level in nearly three months. Although the headline numbers were so-so, Devon appeared to wow the Street with its raised annual production forecast—an expected 16% increase compared to 2017.1
Devon Energy (DVN), 12/17/17 – 5/2/18. DVN daily price chart. Breakout and up gap

Source: OptionsHouse

Devon shares have been climbing since early April—a move that’s part of a larger relative strength story. Ongoing sector rotation has been embedded in the market environment since February, but over the past month, no area has done better than energy, with S&P energy stocks up nearly 12% vs. 2.5% for the S&P 500 (SPX). And despite being in a two-week trading range as of yesterday (and probing the lower boundary of that range), crude oil prices have been hanging around their roughly three-year highs in the $67-$69/barrel area—possibly buoyed by continued Middle East uncertainties (Syria/Russia as well as the renewed prospect confrontation with Iran over its nuclear program).

Yesterday’s rally was DVN’s second big one-day jump in the past couple of weeks, a 7% run-up on April 18 having definitively pushed prices out of reach of the February-April base. We’ll return to the price action surrounding the April 18 move in a minute.

A weekly chart (below) shows Devon’s correction lows this year appear to mark a successful test of the support defined by its 2017 lows, with the stock’s late-January highs above $45 in between (and the closest upside target).

Devon Energy (DVN), 11/10/14 – 5/2/18. DVN weekly price chart. Longer-term support.

Source: OptionsHouse

Overall, eyeballing the chart, scanning the newsfeed, and factoring in sector tailwinds may lead to an off-the-cuff bullish take on the stock—which may be the appropriate long-term position. In the near-term, though, it would be wise to find out what tends to happen in DVN after big one-day gains like yesterday.

Devon’s had its share of them. In fact, since 1985 the stock has had 98 days that have:

●Closed 5% or more higher.

●Made at least a 50-day high.

●Closed above the open.

Devon’s reaction immediately after the April 18 up day, while not quite fitting the pattern (it wasn’t a 50-day high), does a pretty good job of representing the typical price action after these days: The stock pulled back for a few days—in this case, to the breakout level. The stock’s median return after five days was -0.77%, and it was lower more than 50% of the time. After that, however, the stock tended, on average, to move upward.

Big moves and big headlines are always exciting, but if you’re going to attempt to trade them, you have to think tactically—short-term as well as long-term.

 

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1 Reuters. Devon Energy raises 2018 production outlook, shares climb. 5/2/18.