Halliburton (HAL) Draws an Upgrade – What Can This Mean For Investors?

FBR Research upgraded Halliburton HAL Thursday morning, lifting its rating to “outperform” from “market perform”.  With regard to the Deepwater Horizon rig explosion and subsequent oil spill in the Gulf of Mexico, the covering analysts said BP is likely to foot the bill and that overall, it will be extremely difficult to prove gross negligence.  FBR reset its 12-month price target at $44; the stock is currently trading around $29.50 after dropping from an April 23 high of $34.96.

Various option strategies provide alternatives for investors who do not wish to buy the stock outright.  Alternatively, traders who have a bearish outlook on the oil-services sector (or on HAL specifically) could enter a bearish option trade to play the short side, two hypothetical options trades are described below. Remember, these are just examples, not recommendations, and be cognizant of your personal risk/reward parameters before executing any new trades.

*Prices given as of Thursday afternoon

Bullish Option Strategy: Broken-Wing Call Butterfly

Investors who are bullish on the shares can execute a long call butterfly by simultaneously trading the following:

• Buy one October 20 call
• Sell two October 34 calls
• Buy one October 36 call

The net debit for this trade is currently $8.25.  If HAL is trading right at the 34 strike when these options expire on October 15, the trader collects the maximum potential profit of $5.75 (the difference between the 34 and 20 strikes minus the debit paid).   Losses, meanwhile, are capped at the premium paid ($8.25) and occur if HAL is trading south of 20.

Due to the “broken wing” nature of this butterfly spread, there is only one breakeven at $28.25 (the lower-strike long call plus the debit paid). Anywhere above 36, the trader will earn $3.75, or the maximum potential profit minus the difference between the short strike and the higher-strike long call.

Bearish Option Strategy:  Bear Put Spread

Traders who are more pessimistic with regard to HAL could consider a bear put spread.  The July 35/28 bear put spread can be purchased for $4.40 by buying the 35-strike put and selling the 28-strike put.  The maximum loss is capped at 100% of the $4.40 debit paid, while the maximum gain is $2.60.  Breakeven for this strategy is $30.60, or the long put minus the premium paid.

What are your thoughts for the short-term future of HAL?

Compare OptionsHouse rates for stock options with other brokers. New to options?  See how your trade ideas would fare in a virtual trading account before committing any real money.

Photo Credit: Jason Sussberg

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