CLR Options Bulls Turned a Quick Profit During Short Squeeze

The oil stock was heavily shorted at the end of 2018

Subscribers to our Schaeffer's Weekly Options Trader service recently won big with the Continental Resources, Inc. (NYSE:CLR) weekly 1/11 37-strike calls. Here's a quick look at what initially drew us to CLR, and how the successful bullish options trade unfolded.

When we recommended the call on Thursday, Dec. 27, the energy stock was fresh off a successful test at $36, half its 2018 closing high from early October. CLR shares had been hit hard in the fourth quarter, and their 14-day Relative Strength Index (RSI) indicated they were oversold, and potentially due for a short-term bounce.

Plus, the stock's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) was perched at a top-heavy 2.87, indicating near-the-money puts outweighed calls among options in the standard January series. CLR's bounce occurred near put-heavy strikes, pointing to buying potential as the hedges related to these bets were unwound.

There was room for analysts to upwardly revise their outlooks, too. While 20 brokerages maintained "strong buy" ratings on Continental Resources stock, six others still held tepid "hold" ratings.

Even more encouraging was the elevated number of CLR shares held by short sellers, which made the stock a short squeeze candidate as we moved into 2019. Specifically, 9.1% of the equity's float was sold short at the time of our recommendation, and data from Schaeffer's Senior Quantitative Analyst suggested the longer-term laggard could benefit as bearish bettors waited until the new calendar year to cover their positions, thereby delaying paying taxes by another 12 months.

After closing 2018 at $40.19, CLR stock proceeded to string together a six-day winning streak at the start of the year. In addition to an upgrade to "outperform" from "market perform" at BMO on Jan. 7, short sellers started covering, with short interest on Continental Resources falling 12.8% in the most recent reporting period. We closed half of our position on Jan. 4, and closed the other half ahead of expiration on Jan. 11, allowing traders to lock in net profit of 150%.