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Traders Bet That China Oil Giant CNOOC Will Fall

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By STEVEN M. SEARS

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CNOOC, the giant Chinese oil company, is running into problems in the options market.

Investors have started buying bearish put options on CNOOC’s stock (ticker: 883.HK ), betting that the stock is poised to decline. CNOOC’s U.S.-traded American depositary receipts ( CEO ) are up about 20% this year, outpacing the Standard & Poor’s 500 index’s almost 8% return.

The recent trading activity may have anticipated Credit Suisse’s Monday decision to lower CNOOC’s investment rating to Underperform from Outperform.

The Swiss bank is concerned that CNOOC’s stock price is vulnerable. Oil prices have corrected by about 20% since June’s peak, but CNOOC’s stock price has barely budged, arguably creating downward pressures that the bank reckons cannot be alleviated by cost cutting.

The stock is currently pricing in $75-per-barrel oil, making it “one of the most expensive Asian names,” wrote Horace Tse, a Credit Suisse analyst, in a recent note. Brent crude oil, by contrast, is trading around $45.24 per barrel, while West Texas Intermediate oil is priced around $42.89.

Investors who agree that CNOOC’s stock is at a crossroads might consider buying September $115 puts on the ADR. Last Friday, the implied volatility of CNOOC’s at-the-money options set an annual low. This suggests that investors can buy CNOOC puts without paying a fear premium.

With the stock around $119, CNOOC’s September $115 put was offered at $4.20. If the stock is, for example, at $105 at expiration, the put is worth $10.

The put purchase reflects a view that investors will increasingly focus on CNOOC’s operational challenges and bearishly rerate the stock, putting pressure on the shares.

The risk to this trade thesis is that CNOOC is immune to operational and market pressures. The stock’s dividend yield is 5.4%, a level that is sharply higher than most investors can earn in the fixed-income markets. The yield is so compelling that investors may buy the stock–or hesitate to sell it–just to make the attractive return. Investors could overweight that factor even as underlying business conditions prove difficult.

Should that occur, and the stock advances, or at least trades around its current level, the put trade fails.

Still, CNOOC’s puts are surprisingly active, indicating expectation that the stock will succumb to mounting pressures. One investor recently bought 2,000 September $140 puts and the same number of March $140 puts. The deep-in-the-money trades are unusual. Most investors who want to short equities with put options buy strike prices just below a stock’s market price.

But for some reason, CNOOC’s put trading patterns have investors focused on distant strikes. Other popular contracts include the September $50 put, with open interest of about 1,300 contracts, and the August $75 put, with 470 outstanding contracts.

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TAGS: Oil, Crude, Stock


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