Big Printin’ – $XOP, $GLD

by Dan February 16, 2016 3:26 pm • Commentary

Is oil bottoming? Your guess is as good as mine.  Is the production freeze from some large producing nations announced over night a start? Sure, but given last week’s massive reversal off of 13 year lows, the news may be ‘IN’ the price.  Traders “sold the news” today as there is a good bit of skepticism that other large oil producers will adhere and there is clearly some disappointment that most had hoped for a cut in production, not just a freeze.

One trader was looking up, way up in the S&P Oil & Gas etf, the XOP. When the etf was $23.89 (shortly before noon), 25,000 of the Sept 32/40 call spreads were bought to open for 86 cents, or $2.15 million in premium.

This trade breaks-even at $32.86, up 37% from the trading level, with a max profit of up to $7.14 to $40 with max gain above. If the XOP is below $32 the trader loses the $2.15 million in premium.

To put the magnitude of the XOP’s decline from its 2014 highs, and what the trade detailed above is looking to capture, look at the green line as the break-even of the Sept call spread, and the red line where profits are capped, up about 67% from current levels:

XOP 5 year chart from Bloomberg
XOP 5 year chart from Bloomberg


Also while we are discussing long shot options trade, there was a long shot (and long dated) trade in the gold etf, GLD.  A risk on day like today is bad news for the rally in Gold over the last month, with GLD down 2.75% today, down 5% from Thursday’s 52 week highs but this trader isn’t concerned about day to day moves in the near term, he/she is swinging for the fences.

When the GLD was $116 a trader looked out almost 2 years, and bought to open a well out of the money call spread, paying $2.10 for 10,000 of the Jan2018 160 / 200 call spreads, or $2.1 million in premium.

This trade breaks-even at $162.10, up 40% from the trading level, with a max gain of $37.90, or up to $37.9 million between $162.10 and $200, with a max gain above.  To put the break-even in some perspective, the 10 year chart below shows that it was 3 years ago when GLD was last above $160, and the commodity has never traded at a level of the short strike of the call spread:

GLD 10 year chart from Bloomberg
GLD 10 year chart from Bloomberg

The options market is suggesting that the Jan2018 160 calls only have a 22% chance of being in the money on Jan18 expiration, that 22% chance will only decrease if the etf fails to move higher, and as we get closer to expiration.