Traders bet against oil stocks ahead of earnings

It could be a tough earnings season for energy stocks.

Crude oil prices fell 44 percent over the course of the fourth quarter, which naturally has put severe downward pressure on the shares of energy stocks, as well. However, the exact extent to which plunging oil prices have impacted energy companies' earnings and predictions for the future will be seen in the weeks ahead, as energy companies report their earnings and provide guidance.

Analyst earnings estimates on energy names have fallen 25 percent over the course over the quarter, according to FactSet.

The first big oil company to report will be oil-services name Schlumberger, which is due to release results after Thursday's bell. And traders don't appear to be too excited about what they'll hear.

Pumpjacks operating near Ruehlermoor, Germany.
Getty Images
Pumpjacks operating near Ruehlermoor, Germany.

Even though the stock has lost nearly a third of its value since the beginning of July, plenty of investors have taken to the options market to make bearish bets on the stock ahead of the results. On Tuesday and Wednesday, the stock saw more than double its average daily options volume trade, with more big trades in the bearish put options.

On Tuesday, the biggest trade was a purchase of 10,000 January 78-strike puts for $1.53. On Wednesday, another 23,000 of those puts traded hands. Investors buying them today would need to see the stock fall about 2.5 percent on earnings in order to break even on the trade.

These trades could represent outright bets that earnings will disappoint, or they could represent insurance purchased by long-term holders of the stock.

Options prices "are elevated as expected, given where the market's at, and given the uncertainty around oil prices," commented Dan Nathan of RiskReversal.com on Wednesday.

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