SPN Bearish Head and Shoulders

I have stopped watching Superior Energy Services (SPN) for a bearish position. The stock dropped to, but failed to break underlying support at $29. It looks as though we have missed the bearish opportunity with both the MACD and Stochastics bottoming out on the daily chart. SPN will be announcing earnings on Feb 26th, so we may get a pre-announcement move this week in either direction. Some people call the straddle a non-directional option strategy, but I like to think of it a bi-directional option strategy. You make money if the stock moves up big or down big. The current March 30 straddle is listed at $2.30 and pretty fairly priced with a little extra weight on the call side. A quick move above $32.30 or below $27.70 would be profitable. That size move is possible over an earnings announcement.

By examining the 5 month chart of SPN, we can see the formation of a head-and-shoulder pattern. The drawn lines identify the shoulder line and the neck lines with an obvious head right in the middle. If this pattern confirms by dropping below neckline (which corresponds to our underlying support), the targeted move is approximately 6 points into the $22-23 area. It's interesting how that matches up with the low on the chart back in Sept. Remember that all patterns need confirmation, and the confirmation of a head and shoulders pattern is a break of the neckline.

I have now discovered two possible strategies for SPN. The short-term earnings straddle would allow for a break in either direction, but requires a quick move to take advantage of the March options. The other strategy is to take the short position in anticipation of the bearish break. A longer term option would be required to take full advantage of a move to $23 or lower. The Jun 30 put is currently at $2.40 at would be valued at better than $7.00 if SPN hits $23 for a 200% return. The June expiration gets us plenty of time for the move to be completed without a major hit to the time value.