National Oilwell Varco Options (NOV): Unusual Trading Activity
Options in oil and gas drilling equipment supplier National Oilwell Varco (NOV) experienced a large amount of unusual trading activity right at the end of the day yesterday.
We’ve finally got a little market rally going. And the oil sector is showing some strength amidst overall market strength as well as activity overseas.
But not every oil and gas company is in rally mode.
As you may already know, National Oilwell Varco has been beaten down over the last five months. Since hitting a 52-week high of $87.72 in February, NOV has dropped more than 20%.
And the stock remains down even as the broad market rallies.
This is important to note. You see, experienced option traders look at these technicals in order to come up with their trades.
In this case, a single put trader dominated the option activity in NOV yesterday. Apparently he wasn’t concerned about a stock market rally driving the stock higher.
With NOV trading at $68.15 per share, the trader swooped in and purchased 5,500 NOV August $62.50 put options. In doing so, he paid a total of $561,000 to control the equivalent of 55,000 shares of NOV.
Remember, put buying is a bearish trade where an option trader needs the stock to fall below the strike price by expiration. As long as this occurs, the trader has unlimited upside on his trade.
And that’s exactly what this trader’s expecting. As long as NOV continues its downtrend by August expiration, he’ll walk home with a very large profit.
So, what does NOV do exactly?
National Oilwell Varco is one of the largest equipment suppliers in the oil drilling industry. They provide a comprehensive line of equipment for rigs and consumable products used in oil and gas production. The company also provides distribution services, which include maintenance, spare parts, and repair services for its oil and gas equipment.
Sound like a great company… but why buy puts on NOV?
Many drillers are choosing to upgrade their existing rather than buying new equipment right now. Upgrades on offshore oil rigs can add as many as 20 years of useful life. And this does not bode well for NOV.
In addition, this uncertain market has US drilling activity extremely volatile. This will make customers reluctant to spend money on brand new land rigs.
And any sustained decline in drilling activity could mean a sharp drop-off in new land rig orders as well as order cancellations. Of course, this will affect NOV’s revenue quite a bit.
Finally, there is about $6.2 billion worth of goodwill on NOV’s balance sheet.
If management overpays for new and existing deals, they could be forced to take large write-downs. This would certainly have an impact on the company’s financials.
For all of these reasons and more… I think this trader knows NOV is in trouble and poised lower.
And as a result, he’ll be rewarded handsomely!
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Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
