Upon initial examination, Kosmos Energy (NYSE:KOS) appears to face challenges. A quick look at its 52-week chart reveals a nearly 15% loss in KOS stock. Furthermore, the hydrocarbon sector hasn’t been particularly appealing, despite production cuts by major oil-producing nations; crude prices have remained relatively stagnant over the past year.
At first glance, these factors may not paint a positive picture for KOS stock. As an upstream specialist in the energy value chain, Kosmos primarily engages in the exploration, development, and production of hydrocarbons. The capital-intensive nature of the upstream industry poses a significant obstacle when crude prices are flat or declining.
However, the situation for KOS stock is more nuanced. In a recent analysis, I highlighted the speculative case of Rent the Runway (NASDAQ:RENT), a fashion subscription service facing a drastic 83% loss. Despite its dire situation, RENT experienced a nearly 53% gain in the week ending Jan. 12, with the potential for further increases by Jan. 19. How did I anticipate this development?
While no one possesses a crystal ball, information is accessible to everyone. On Jan. 8, Barchart’s unusual volume indicator signaled increased activity for the Jan 19 ’24 1.00 Call, with an institutional trader selling 7,944 contracts of this call option. This attracted bullish investors to take the opposite side of the bet, leading to a substantial gain in RENT shares.
A similar scenario may await KOS stock. On Jan. 11, Fintel’s options flow screener recorded the sale of 4,000 contracts of the Feb 16 ’24 7.00 Call, collecting a $60,000 premium. Understanding options market terms is crucial, where the expiration date is Feb. 16, 2024, the strike price is $7, and the premium is the total price paid by buyers to the call seller on Jan. 11.
Call options provide the holder the right to buy the underlying security at the strike price, while the call writer must sell at that price upon exercise. Engaging in near-expiry call options can catalyze price discovery, as seen in the enticingly low strike price of $7 for KOS stock, less than 8% above the closing price on Friday.
However, it’s essential to recognize the defined and undefined risks associated with sold call options. While the defined risk involves the difference between exercised contract values and the lower strike price, the undefined risk arises when the call writer sells contracts without owning the underlying security. Traders should carefully consider the potential risks and rewards before entering such speculative positions.
Featured Image: Freepik
Author Faith Yakubu 
