Call it a high-energy bet.
U.S. oil prices jumped to a six-week high on Thursday on falling domestic inventories and a storm heading toward the Gulf Coast. But as the rally began on Wednesday, one options trader made a large bet that it wasn’t ending anytime soon.
The mystery trader put on a $55-$64-$75 call spread risk reversal for $2.25 each in the Energy Select SPDR Fund, or XLE, which tracks energy stocks. This is a bet of $2.25 million that the exchange-traded fund will rise between 3.5% and 17% by the trade’s December expiration.
« This is a good trade to take a look at, » Mike Khouw, co-founder and chief strategist at Optimize Advisors, said Wednesday on CNBC’s « Options Action. »
« One of the things you’ll notice is that the [$]55 puts that they sold [were] very close to those December ’18 lows, and the [$]75 strike calls that they sold [were] also not far off of the [$]77-and-change highs that we saw in the XLE over the course of the past year, » he said.
That spread gives the trader exposure above the XLE’s current level but hedges against downside risk if the ETF were to fall toward those lows made last year, Khouw said.
But although the XLE’s nearly 12% year-to-date gain might seem encouraging for the mystery trader, the bigger picture is troubling, said Steve Grasso, director of institutional sales at Stuart Frankel & Co. He pointed out that the XLE has lost 14% in the last 12 months and 6% in the last five years.
« You can’t invest in these longer term, » he said in the same « Options Action » segment. « We are in oversupply of oil. Ultimately, the macro: We are going lower in oil. You couldn’t have scripted a more bullish scenario with everything — with the backdrop from the storm, from Iran, from Venezuela, to everything — for the price of oil, and it still hasn’t been able to breach those all-time highs. »
Guy Adami of Private Advisor Group, who is invested in XLE holding Devon Energy, disagrees with Grasso.
« He’s been right, but I think energy sets up pretty well here, especially if central banks are going to put a blowtorch to their respective currencies, » he said Wednesday on « Options Action. »
The XLE was up less than 1% in premarket trading Thursday.