Option Trade: Sold SLB Strangle

The May 4th edition of Barron’s had a bullish article on Schlumberger Ltd (NYSE:SLB) which led me to check its option prices.  Before I detail that part, here are a couple of the quotes that helped formulate my trade decision:

• Schlumberger’s shares could rise 20%-25% in the next 24 months, to 60. And if there were a strong global rebound, the stock could wind up 50% higher four or five years down the road.
• …the stock is up about $15 a share from its lows, but the long-term investor should look at what Schlumberger’s EPS would average over the cycle. Given the $4.45 EPS peak and a typical 50% drop to trough profits, or about $2.25, a through-the-cycle normalized EPS of $3 for Schlumberger seems reasonable, if not conservative. Applying the company’s typical 20-25 P/E gives a share range of $60-$75, though the higher number would likely require a full oil-demand recovery.

Based on the full article and my beliefs on where oil is heading in the near term I decided an option strangle could be my best trade on SLB.  I double checked the chart and saw SLB could run into resistance around $55.00 and should get support on a pull back around $45.00.  I considered selling a straddle at $50.00, close to where it closed on Friday afternoon.  That would have given me a cushion of a little more than $7.00 on each side, so to $57 and down to $43.00, but one side would be assigned at expiration, if not before. 

Instead, I sold a strangle on SLB.  While SLB was trading at $52.20, just after the markets opened, I sold 2 SLB June 45 puts (SLBRI) at $1.16 and received $230.49 and sold 2 SLB June 55 Calls (SLBFK) at $2.14 and received $416.49.  Those trades combined gave me a net credit of $646.98.  My limit order was set for a $3.30 credit for each of the two sides, which was above the highest ask on Sunday night.  I expected SLB to get a bump from the Barron’s article, but misjudged how much it would move and how much the options would be affected and how much of a bull run we’d have overall today. 

With this trade I have a cushion up to $58.30 and down to $41.70 not counting commissions.  That doesn’t look like much of a difference between my strangle and the straddle in my break even point, but the potential for a full profit is much higher with the strangle.  With the straddle I’d take a loss on one side and would only take a profit on the other which means my profit would be smaller if SLB is trading close to $45 or $55 at June expiration.