Energy related stocks have been on a tear recently from a combination of a Middle East related oil price spike and a recent round of takeover chatter. APC have been rumored target of XOM, seeing a surge in the last couple months in call open interest, while MRO has seen considerable out of the money call buying in the last week.
Earlier today there was a fairly large out of the money call spread (bought to open) in pipeline company Kinder Morgan (KMI), where a trader bought 40,000 of the Jan 42.50/47.50 call spreads for .25 (bought the 42.5c for .28 and sold the 47.50 calls at .03) when the stock was $34.75, with a break-even at 42.75, up 23%. The trade risks $1 million in premium to make $19 million if the stock is $47.50 or higher.
I would say two things about this trade. First, while the premium is not substantial for a large institution, the size in terms of contracts indicates someone looking to play for a home-run rather than a trade with a higher probability of success. And second, the idea of selling the Jan 47.50 calls at .03, for a credit of $120,000 seems odd to me, aside from the fact that the trader probably had to pay close to $80,000 in commissions to put this trade on, so maybe it was simply to offset execution costs.
Either way you slice it, the buyer of this spread is buying a lotto ticket to possibly make a lot of money on the low probability event that the stock is up 36% or more on January expiration.
Taking a quick look at the chart since KMI’s 2011 IPO, it is clear that the 42.75 break-even is well above the all time highs:
This is an interesting speculative bet and worth remembering if KMI starts moving higher on news or rumors.