The oil and gas sector has pulled back recently on growing recessionary fears.
The VanEck Oil Services ETF was down 2.51% on Friday and down more than 4% early Monday. It looks like it could be headed back to the 200-day moving average around 270.
Traders who think weakness in OIH stock might continue could look at a bear call spread on this ETF.
The top two holdings in OIH are SLB at 19.27% and Haliburton at 10.59%. So these two stocks could have a large impact on the price change in the ETF.
OIH Main Components Break Down
Both SLB and HAL broke through key support levels last week, and both gapped down Monday.
Let's look at how a bear call spread might be set up on OIH.
As a reminder, a bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
On OIH stock, an April expiry bear call spread could be set up using the 335 strike as the short call and the 340 strike as the long call.
On Friday, that spread was trading for around $0.80.
Maximum Profit $80 Per Contract
If executed at that price, the maximum profit on the trade would be $80 per contract with a maximum risk of $420.
The spread will achieve the maximum 19.05% profit if OIH closes below 335 on April 21. In that case the entire spread would expire worthless, allowing the trader to keep the $80 option premium.
The maximum loss will occur if OIH closes above 340 on April 21. That would see the premium seller lose $420 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
A stop loss could be set if OIH trades above 315, or if the spread value rises from $0.80 to $1.60.
Bearish Trade On Oil ETF
As this is a bearish position, traders who think OIH stock will continue moving higher from here should not enter this trade.
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Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
