Why Traders are Getting Bearish on Halliburton
Is Halliburton telling us that the U.S. could be headed for negative growth?
On Tuesday, I noticed some unusual options activity in Halliburton. One trader bought 3,827 December 30-strike puts for $0.54, while the stock was at $31.35.
This is a bearish bet that will profit if Halliburton is below 29.46 at December expiration. That would be a 6 percent move to the downside in 30 days.
Halliburton is a high-beta stock that fell over 20 percent from its September highs, before rebounding a few percentage points with the broad market this week. This trader is using the opportunity provided by this bounce to get bearish exposure to the stock.
Why might you want to be bearish now?
First off, Halliburton's technicals look bearish. The stock made a head-and-shoulders top on its daily chart over the last few months—in other words, the stock made a lower high on lower volume, and then fell through to lower lows on increasing volume. This price pattern would suggest that the stock trades down to $28.00, which also coincides with previous area of major support, and is near the stock's 52-week low.
The stock also faces some fundamental headwinds.
In Hallibuton's most recent earnings call, David Lesar, the company's chairman, president, and CEO, said, "We expect the next couple of quarters to be pretty bumpy."
That's because of price volatility in guar gum, a key material used in hydraulic fracturing. This volatility led Halliburton to hedge at an unfavorable price, which has left them stuck with huge amounts of overpriced inventory.
Another reason for the bumpiness is that Halliburton's North American customers are cutting back on spending, due to high costs and low energy prices. Relative to the third quarter of 2011, there are 6.5 percent fewer rigs in North America, which means fewer customers for Halliburton.
Halliburton's international operations remain strong, but may not be stellar enough to drive substantial growth going forward. I think if there is an area to hedge out other bets on U.S. growth, HAL puts might be a good one to use.
Based on the commentary from the CEO, it seems that they are telling us that U.S. GDP growth will be nominal. Although there have been other bullish bets made in XLE last week, with the recent move up in the market, traders are taking profit in names that pose risk, such as HAL.
Plus, I like that this trade plays for a near-term sell-off in the stock, because that gives it a very favorable risk-reward ratio. If Halliburton does trade down to $28, this option will return $1.46 in profit—but it can only lose $0.54 in the event that the scenario does not play out.
Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."
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