The $1.1 Million Bearish Bet On Marathon Petroleum Corp (MPC)

Marathon Petroleum Corp (NYSE:MPC) has been rallying with crude futures recently, but put buying has been picking up speed

Dec 21, 2016 at 10:09 AM
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Options traders have been growing increasingly skeptical of Marathon Petroleum Corp (NYSE:MPC) of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), MPC's 10-day put/call volume ratio has jumped to 2.61 from 0.21 over the past two weeks. What's more, the current ratio ranks just 7 percentage points from a 52-week peak, meaning puts have been bought to open over calls at a near-annual-high clip on the energy stock.

This heavy put trading was in full view in Tuesday's session, where 53,919 puts crossed the tape -- 14 times the average daily volume of 3,691, and an annual high for the number of MPC puts traded in a single session. As a point of comparison, fewer than 5,400 calls changed hands, slightly higher than the expected daily amount of 4,979 calls.

Nearly all of the day's put volume centered at the April 35 strike, due to a massive block of 22,853 that Trade-Alert suggests was bought to open for an initial cash outlay of $1.1 million (number of contracts * $0.50 premium paid * 100 shares per contract). What's more, a separate block of 14,481 April 35 puts also appears to have been bought to open for $0.50 apiece, resulting in a net debit of $724,050. While it's not clear if these two transactions are related, the expectation is the same -- for MPC stock to breach $35 by April options expiration. Risk is limited to the initial price paid, while profit will accumulate on a move below breakeven at $34.50 (strike less $0.50 premium).

Given the energy stock's strong technical backdrop, it's possible some of the recent put buying -- particularly at out-of-the-money strikes -- is a result of shareholders protecting paper profits against a pullback. In fact, the shares of Marathon Petroleum Corp (NYSE:MPC) haven't traded south of $35 since late June, and are up 47.6% since bottoming at a post-Brexit low of $32.84 on June 27 -- more recently, rising in step with crude futures. Plus, although the energy stock is down 1.9% today to trade at $48.46, it appears to have found a foothold in the $48.50 area, home to a 61.8% Fibonacci retracement of its July 2015 highs and February 2016 lows.

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