Tellurian Options Hot After Rare Downgrade

The energy stock is headed toward its worst day since late 2017

Tellurian Inc (NASDAQ:TELL) is spiraling today -- down 13% at $6.70 -- after Stifel downgraded the energy stock to "hold" from "buy," and slashed its price target by $7 to $9. The brokerage firm sees risks to TELL's margins and cash flows from expectations for lower long-term gas prices.

Most analysts remain bullish on Tellurian stock. Prior to today, seven of nine covering brokerages called the equity a "buy" or "strong buy," while the average 12-month price target of $11.93 stands at a 78% premium to current trading levels.

And even as the stock heads toward its worst session since December 2017, bulls appear to be driving the action in TELL's options pits today. At last check, roughly 6,250 calls and 2,900 puts have traded so far, five times what's typically seen at this point, and volume pacing in the 99th annual percentile.

The January 2020 12.50-strike call is most active, and it looks like new positions are possibly being purchased. If this is the case, the LEAPS traders expect TELL shares to break out above $12.50 by January options expiration.

It's also possible short sellers are using these deep out-of-the-money calls to hedge against any upside risk. Short interest accounts for 29% of the equity's available float, or 17.5 times the average daily pace of trading. These bears are sidelined today, though, with Tellurian on the short-sale restricted list.

Looking closer at the charts, TELL stock has been sliding since its April 3 annual high of $11.80, down 43%. A recent bounce near its year-to-date breakeven mark was quickly halted by the equity's 180-day moving average, and today's bear gap puts the shares back in the red for 2019.