OAS Call Option and Short Interest Analysis

Click on Chart to Enlarge

This daily chart is of OAS which is Oasis Petroleum, an oil correlated equity.  I have a order to purchase the February 15 strike call option.

According to data on Schaeffer's Research, there has been a near doubling in the amount of shares sold short from the Dec 1 to the Jan 1 reporting period.  As of the current data, there is over 24% of the float sold short.  This is obviously an indication of pessimism on the stock, which seems justifiable (and profitable over the last several months).  Nevertheless it does create a large potential supply of buying power in this stock if prices rally and put the shorts at a loss.

A bit of my logic on this is indicated on the chart above.  The light blue moving average is the simple average price since December 1st at which point 8.61 million shares were sold short.  As of January 1st 16.91 million shares were sold short.  So basically we have seen a huge increase in the number of shares shorted since December 1st.  And I don't know exactly were they were shorted, but just using the average price and assuming they were relatively evenly shorted during that period, then that would put the average price shorted at about 15.00 (or maybe 15.90 if using the high of each bar for the average).  So if prices rise above the 15.00 level, that would possibly put the average short position at a paper loss at that time.  And then any further rise will put those newly shorted shares at an even further loss, creating pressure to cover the position.  Covering is done by buying the shares, and so that would be significant buying interest forced into the stock.

Additionally, price this week did not even come close to making a new low for the decline despite oil's new low.  This again is a non-confirmation with the commodity that may be a sign of bottoming in the sector and relative future strength in this stock.  Furthermore, a move above the December 23rd high would be a stop loss point on the chart, and again, given the hefty short interest, may lead to a short covering burst of buying.  There is a large heavy volume unfilled gap down above that at 25.24.  If oil is bottoming here and going to stage even a bear market rally, that $25 level would be a likely target for OAS in my opinion for the coming weeks.

So my plan here is to buy the call with the expectation that we may see prices rally in the next 5 weeks and make a significant gain in the option.  If buying, a simple strategy could be to enter a limit order to sell half the position at 100% or 1/3 at 200% gain and then hold the rest assuming prices appear to be moving higher.  Then a more finely tuned final exit can be sought.

But the set-up here looks good for an equity purchase as well with the same overall trade logic.

If there are any follow up questions to this analysis or oil related issues, reply here and I will try to assist you.  I view this oversold oil sector and the XLE etf as a prime opportunity for profit at the current time.


Pete