Falling Oil Draws Rare Batch of Options Bears to XOP

Call buying has been popular on shares of SPDR S&P Oil & Gas Exploration & Production ETF (XOP) in recent weeks

Mar 20, 2017 at 12:30 PM
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Oil prices are sliding today, as concern over a domestic supply glut weighs on energy shares. While April-dated crude futures were last seen trading down 0.8% at $48.38 per barrel, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) is off 0.7% at $36.17, and options traders are shifting their focus to puts from calls. At last check, roughly 54,000 XOP puts had changed hands, compared to 33,000 calls. Drilling down, it looks like traders are betting big on a continued short-term retreat for the energy exchange-traded fund (ETF).

Specifically, the April 36 put has seen the most action in XOP's options pits -- and is the most active ETF contract so far -- with roughly 36,000 contracts traded. The bulk of the activity occurred in several large blocks, including an 8,570-contract sweep that appears to have been bought to open for $994,120 (number of contracts * $1.16 premium paid * 100 shares per contract). This is the most the option trader stands to lose, should XOP settle north of $36 at the close on Friday, April 21 -- when the front-month options expire. Profit, meanwhile, will accumulate on a move south of breakeven at $34.84 (strike less premium paid), territory not explored since last November.

Today's bearish betting runs counter to the recent trend seen at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In the last 10 trading sessions, speculative players have bought to open 78,939 XOP calls, versus 75,407 puts. The resultant put/call volume ratio of 1.05 ranks higher than 88% of all comparable readings taken in the past year, meaning calls have been bought to open over puts at a faster-than-usual clip -- with options traders showing particular attention to the April 40 call.

While it's possible some of this activity is a result of "vanilla" options traders, it's likely that a portion of the recent call buying -- particularly at out-of-the-money strikes -- is a result of oil shorts hedging their bearish bets against any upside risk. Short interest on XOP, specifically, has surged 31.6% since the start of the year to 60.2 million shares, the most since early December.

Looking at the charts, XOP has struggled along with the broader energy section, with the ETF down 20% since topping out at an annual high of $44.97 on Dec. 12. Amid this decline, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has breached its formerly supportive 200-day moving average and the $36.25 level, home to a 38.2% Fibonacci retracement of its 2016 rally.

xop shares price chart

Nevertheless, BofA-Merrill Lynch said this recent selloff in the energy sector "should provide a floor," and creates "attractive valuations." The brokerage firm also upgraded the group to "overweight," citing that it is currently trading at a 14% discount relative to historical price-to-book levels.

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