Schaeffer's Midday Options Update Features ConocoPhillips and Energy Select Sector SPDR Fund.

CINCINNATI -- Today's Schaeffer's Midday Options Update features ConocoPhillips (NYSE:COP) and Energy Select Sector SPDR Fund (AMEX:XLE). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day. The Midday Options Update is published every day at www.SchaeffersResearch.com - the home of Bernie Schaeffer and Schaeffer's Investment Research.

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Options Update: Should You Waste Energy on ConocoPhillips?

As investors steel themselves ahead of the 2:15 Federal Reserve policy decision, the market averages remain mixed on either side of the breakeven zone. December crude oil futures are on the rise; at last check, a barrel of oil would cost up $61.29, up $1.94 today. A chilly forecast for much of the country has sent natural-gas futures more than six percent higher.

In economic news, the Energy Department reported the crude oil inventories dropped by 3.3 million barrels in the week of October 20. Gasoline supplies fell by 2.8 million barrels and distillate fuel supplies fell by 1.4 million barrels. Meanwhile, the American Petroleum Institute showed crude supplies down by 3.7 million barrels, gasoline supplies down by 2.3 million barrels and distillates down by 588,000 barrels. Analysts were expecting distillate supplies to fall, but were predicting gains for both crude and gasoline.

Most-Active Options Update

At 1:44 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA - 12,105.2) has given up 22.6 points, while the S&P 500 Index (SPX - 1,378.72) is up 1.29 points. The Nasdaq Composite (COMP - 2,348.3) has added 3.5 points. At 1:45 p.m. Eastern Time, 3,483,289 calls have changed hands compared to 2,295,750 puts, equaling a single-day put/call volume ratio of 0.65. The CBOE's equity put/call volume ratio stands at 0.75, while the ISE's ratio weighs in at 0.64.

ConocoPhillips

Oil-related stocks seem to have finally come out of their falling-crude-prices induced coma during the past couple of weeks. But does that mean it is really time to dive back into the energy sector? As far as members of the Energy Select Sector SPDR (AMEX:XLE) are concerned, I'd have to say no. While XLE has bounced back a bit during the past couple of weeks, it has still underperformed the S&P 500 Index (SPX) on a daily relative-strength basis since mid-July. Furthermore, the exchange traded fund (ETF) has recently rallied into long-term resistance at the 57 level. For more on this sector, and XLE, please check out the following articles by Bernie Schaeffer: Schaeffer on Charts: A Murky Picture for Energy, and Schaeffer's Media Outtakes: Energy Bulls Keep On Waiting For a Recovery.

Turning to today's focus company ConocoPhillips (NYSE:COP), options players are apparently hopeful for a rebound. More than 24,000 calls have crossed the tape so far today at COP's November 65 strike, which sports open interest of roughly 23,706 contracts. This heavy activity at this far out-of-the-money strike could be taken as very bullish, as much of today's trading could translate as fresh open positions. Keep an eye on this strike tomorrow for confirmation.

Today's preference for calls is not a one-shot deal for COP either. The stock's Schaeffer's put/call open interest ratio (SOIR) has dropped sharply from a reading of 2.00 in mid-June to today's perch at 0.62, in the 12th percentile. This reading indicates that options speculators have been more bearish toward COP 88 percent of the time during the past year. The stock has also declined during this period of bullish sentiment, a prime contrarian indication that the shares could continue their descent.

Elsewhere on the sentiment front, there is little to cheer about for COP. Less than one percent of the stock's total float is sold short, and 11 of the 16 analysts covering the shares rate them a "buy" or better. It seems to me that, after looking at the sentiment figures, everyone who wants to own COP shares already does, leaving practically no sideline money to help sustain the equity's recent show of technical strength.

Speaking of technicals, COP has rallied back from a near-term low of 54.90 only to encounter its declining 20-week moving average once again. The stock broke below this trendline in September, and it could have some trouble regaining its favor once again. And while COP has clambered back above its 20-month moving average, its 10-month still lingers overhead to offer up some potential technical resistance. What's more, you can see on a monthly chart the difficulty that COP has had with the 65 level. With the region attracting a wealth of call activity in the front three months of options, the security could be looking at another rejection in this area in the coming weeks.

It seems to me that with crude failing to gain any real ground on the news that OPEC is cutting its production by 1.2 million barrels, energy stocks could be in a bit of trouble. Barring turmoil in the Middle East, or another global factor that could send crude prices skyrocketing again (which is entirely possible), I just don't see the potential for COP to rally much higher. The recent jump in the shares and the XLE is speculation of a return to the elevated prices we saw earlier in the year, in my opinion, and could pop just as easily as it arrived on the scene. As such, I'm holding a bearish-to-neutral stance on COP for the time being.

Click here to see a Monthly chart of COP since January 2005 with 10-month and 20-month moving averages: http://www.schaeffersresearch.com/wire?ID=17622.

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About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com, is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method.