Schlumberger (SLB): A Lesson in Patience

As many of you likely know by this point I like to track unusual options activity and then assess if the large money bets align with my fundamental and technical views of the stock in order to emulate the trade.

I wanted to go over an interesting case with Schlumberger (SLB), a trade I followed.

Way back on April 21st, I put a focus story out to clients with the following Analysis:

"Schlumberger (SLB) with a bullish 3 legged trade as 5,000 November $55 puts are sold at $2.16 and the November $70/$80 ratio call spread is bought at $1.25 for 5,000X10,000 contracts, a net credit, and very bullish trade with shares at $67.80. The trader keeps the credit as long as shares stay above $55 come November, and offers significant upside, although limited to a move to around $90.75 on the upside before the trade begins to lose money. Shares recently tested the 200 day EMA twice and held and are now breaking into the clear with $72 the next target. After that there is plenty of room for a move to $80. The oil services giant trades 17.6X earnings and 4.25X book value."

At the time of this shares were trading around $67.50, and a trade with this complex structure is extremely bullish due to the potential of being put 500,000 shares of Schlumberger at $55/share. A trader was willing to put a lot on the line, and had a longer term bullish view of this Company, so I figured he/she likely has access to better information and has put in the time to design this trade.

And now, for the lesson in patience:

This trade had to withstand the BP oil spill that cause oil services names to sell off sharply, Schlumberger touching lows of $51.48 back on June 1st, and this trade required a ton of margin with the leveraged bet. For awhile it was looking like we would be taking delivery of a bunch of Schlumberger shares.

However, flashing forward to today, shares closed at $75.80 and the spread is currently pricing around $5.20, not bad for a trade that already paid a credit of $0.91.

Sometimes, no matter how crazy the market gets, you have to believe in your original thesis and ride out some of the chop to eventually hit the jackpot, a very important lesson in trading, and the same can be said in life.... stick to your beliefs, take some chances, and do not let the noise deter you, and things will work out just fine.

Risk Reversals, Synthetics, Covered Reversals, Ratio Spreads, and Various Other Option Strategies can Yield Huge Returns, but obviously come with the added risks, but if you truly believe in a stock you can cash secure the naked part of the options strategy, and be willing to acquire shares at a cheaper price down the road anyhow....

1 Year Schlumberger Chart Below