Short Covering Stokes Bullish Options Trading on NRG Energy Inc (NRG)

NRG Energy Inc (NYSE:NRG) surged in December, as short interest fell off a cliff and crude oil prices surged

Jan 13, 2017 at 2:39 PM
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NRG Energy Inc (NYSE:NRG) has staging a solid rebound since bouncing off early November low at $9.84 -- up nearly 48% at $14.52, and on track to notch its first weekly close north of its 80-week moving average since late 2014. And while much of NRG's positive momentum is likely a result of a standout earnings report and a recent surge in crude oil prices, short sellers may have had a hand in the upside, as well. A recent batch of options traders may be hoping for a continued round of short-covering, too, betting on the stock to extend its lead into territory not seen since late July

In fact, short interest on NRG plunged nearly 27% in the month of December -- a time frame in which the stock jumped 8.1%. There are still 15.3 million NRG shares sold short, though, which would take almost three days to cover, at the stock's average pace of trading. In other words, should the stock continue to move higher, more shorts may be encouraged to cover -- which could translate into bigger gains for the security.

This would likely please a recent batch of option bulls. Over the past two weeks, NRG's March 13 and 14 calls have seen the biggest rise in open interest, with a collective 13,628 contracts added. According to Trade-Alert, a block of 5,000 March 13 calls was bought to open last Friday for $550,000 (number of contracts * $1.10 premium paid * 100 shares per contract), while an 8,000-contract block of March 14 calls was bought to open on Monday for $720,000, based on the $0.90 premium paid.

Drilling down on the front-month series -- which expires at next Friday's close -- peak call open interest is found at the stock's January 2017 12-strike call, with 9,295 contracts outstanding. Data from the major options exchanges confirms some buy-to-open activity here, indicating bullish expectations for NRG Energy Inc (NYSE:NRG) are shared among near-term traders, as well.

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