Energy Unusual Option Activity Report
It was two weeks ago that I posted an article on the bullish option activity on energy stocks. The prices of these companies haven’t exactly taken off like geyser, but the price activity hasn’t exactly been bearish. This is one of the limitations when a lot of the activity it further out in time. This is the case on October 8, where most of the activity was in November and January. With 30 days until the November expiration and 86 days until the January expiration, there is still time for that activity to play out positively.
Today has turned out to be another day where there is significant activity across multiple energy stocks. While it’s not as broad, the day is still young.
Oil Market Run-Down
Oil and other energy supplies will likely fall within its 5-year supply range sometime in November (see chart below). That’s assuming the inventory data keeps trending in the same direction. The crude oil inventory report today showed a draw of 1.0 million barrels against expectations of a 500,000-barrel build.
The energy chart below shows weekly crude oil inventories since March 4. You’ll notice the transition from significant weekly increases in oil inventories to inventory draws. That trend began in since the economy began reopening in May.
Energy Stock Unusual Option Activity
There are three standout energy sector option trades of interest so far today.
Marathon Oil Corporation (NYSE: MRO)
Marathon Oil saw a significant amount of put option volume that was nearly seven times the average. The call option volume was nearly three times the average. Of the volume traded 86% of the calls got filled at the ask and 97% of the puts getting filled at the bid. The combination of long calls and short puts is bullish. Here’s a list of the large trades that were filled in one print:
- 14,600 18 DEC 20 $5 call BOT @ $0.22
- 14,600 18 DEC 20 $3 put sold @ $0.08
- 14,600 15 JAN 21 $5 call BOT @ $0.29
- 14,600 15 JAN 21 $3 put sold @ $0.13
Traders made two long synthetic trades for the December and January expirations. A long synthetic involves buying the call and selling the put. In this case, the strike prices are both OTM, but still is a bullish trade. The $5 call strike chosen represents an expectation that the stock price will be higher than $5 by December. That level is near the 50% retracement of the August to September downtrend.
Exxon Mobil Corporation (NYSE: XOM)
For Exxon, it was the call side that was sizzling today at nearly double the average call volume. With nearly 60% of the volume being filled between the market, it does require some extra certainty about whether it was buy or sell orders. A closer look at the price of the activity below and the price movement of the stock suggests it is long call activity. Here’s a list of the large call trades that were filled in one print:
- 30,000 16 APR 21 $37.50 call BOT @ $1.74
- 10,000 16 APR 21 $37.50 call BOT @ $1.75
You’ll see that traders bought 40,000 contracts in two prints that occurred within minutes of each other. These contracts are further out in time, but the size of the order reflects significant expectations for a bullish move.
A 38.2% retracement of the down trend from the June high would give a near-term target of $41.
ConocoPhillips (NYSE: COP)
Conoco experienced significant volume for both calls and puts. The put volume was over seven times the average and the call volume was nearly three times. About 59% of the call volume got filled at the ask while 71% of the put volume occurred between the market. Here’s a list of the large call trades that were filled in one print:
- 13,471 18 DEC 20 $36 call BOT @ $0.87
- 13,471 18 DEC 20 $27 put sold @ $0.77
The activity above is another example of a bullish synthetic that has the strike prices split out between the call and put. Unlike XOM and MRO, COP broke support on high volume on Wednesday. The $32.50 support was an area it had been testing, it also aligns with the 61.8% Fibonacci retracement level. Despite the bullish option activity, it looks like there may be further downside in COP before it moves higher.
Conclusion
It is hard to be a cheerleader for the energy space because of the significant earnings issues that still plague them. However, that is solvable with higher oil prices and further cost-cutting. The expiration used in the activity is definitely taking a longer view or at least two to three months. The reward to risk is there for these names if you have time and allow these stocks to run.
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