The past week should be a wake-up call for many investors that have relied on the rising tide to lift their ships. What happens when the tide is moving out? That’s what we’re about to experience as the Federal Reserve is expected to begin tightening monetary policy and will provide their statement tomorrow. Rather than rely on the tide, there are potential investments that are more fundamentally sound. One of those sectors is in energy.
With all the news about Russia and Ukraine, the global energy shortages are real and it’s not just oil. Inflation is becoming a real problem and the Fed raising rates won’t suddenly make commodities like oil more available. Also, the failure of many countries and U.S. states to produce sufficient energy is causing some regulators to rethink the energy calculus. That may mean a move toward nuclear and other less desirable but more reliable technologies.
This backdrop makes the option activity over the past two days interesting.
Energy Option Activity
The significance of looking at option activity is identifying money flow. By looking at significant activity, you’re identifying movement by institutions into stocks vis a vis the options market. Often, you’ll the option activity will lead the price or may accompany the price movement as stock and options are traded in tandem.
Let’s take a closer look at today’s underlying activity:
- Occidental Petroleum Corp (NYSE: OXY)
- 5,700 18 MAR 22 $37 calls mostly BOT @ $1.68 to $3.30
- Transocean LTD (NYSE: RIG)
- 22,000 18 MAR 22 $3.50 calls mostly BOT @ $0.27 to $0.39
- Energy Select Sector SPDR Fund (NYSEARCA: XLE)
- 67,000 14 APR 22 70/75 long call vertical BOT in 2 prints @ $1.09 (rolled from 18 FEB 22 58/63 vertical)
- Cameco Corp (NYSE: CCJ)
- 20,000 17 JUN 22 $26 calls BOT in 1 print @ $1.32
- 25,000 17 JUN 22 $33 calls sold in 1 print @ $0.50
- Ratio long vertical spread
- NOV Inc (NYSE: NOV)
- 2,100 25 FEB 22 $17 calls mostly BOT @ $0.60 to $0.65
- APA Corp (NASDAQ: APA)
- 2,100 18 FEB 22 $39 calls mostly BOT @ $0.50
Most all of the above is new activity and not rolling activity. The exception is the activity on XLE that was rolled out and up from the 18 FEB 22 expiration. While CCJ was the only trade that wasn’t oil and gas, the outlook for uranium to be used in power plants fits the narrative.
Conclusion
The energy sector was by far the best performing sector today. It’s something that you could see coming and which I discussed in Monday’s video as well. While Fed policy may hamper some of the bullish outlook in the market and may even turn more negative, the outlook for energy and oil hasn’t materially changed. Energy is also a sector that is trading signficantly below pre-COVID levels. As a result, the moves may be more durable if that market holds up reasonably well. It’s also a sector that may even rise if the market falls more controllably.
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