Big Printin’ – Fillin’ up the Tank in $XOP

by Dan April 19, 2016 3:23 pm • Commentary

The OPEC meeting came and went this past weekend, and as the investment world is well aware, after a sharp but brief drop yesterday, Crude Oil is trading very near the levels where it closed last week. The price action following the OPEC member’s inability to secure a production cut, let alone a freeze, is nothing short of impressive, especially when you consider the threats by the Saudis to apply pressure to Iran by also increasing production if they will not cooperate.  Forget the failure of the meeting which by most people’s guesses had a low probability of success, but the jockeying since should have put downward pressure on the commodity.  Well, with crude above $41, also above its 200 day moving average, it very much looks like it is trying to bottom:

Crude 2yr chart from Bloomberg
Crude 2yr chart from Bloomberg

Oil related equities have traded in lock step with the commodity, as the XOP, the S&P Oil and Gas etf is up more than 50% from its January lows, today trading at its highest levels of 2016, and above its 200 day moving average for the first time since September 2014:

XOP 1yr chart from Bloomberg
XOP 1yr chart from Bloomberg

If the etf can get through near term resistance at $35, it looks like and air-pocket up to the high $30s, where there looks to be considerable technical resistance at $40.

There appears to be at least one oil bull who thinks that a break above $40 could be in the cards by the end of the year, with call volume exploding today (calls outnumbering puts 5 to 1 and call volume 10x average daily volume). There were three trades that caught my eye.  First when the XOP was $34.25 a trader sold to close 25,000 Sept 32/40 call spreads at $3.24, collecting $8.1 million in premium and bought to open 50,000 Dec 42/48 call spreads for 88 cents to open, or $4.4 million in premium.  This new trade breaks-even at $42.88, up 25% from the trading level, with a max potential gain of up to $25.6 million if the etf was $48 or higher on December expiration.

And that wasn’t it, there was another roll when the stock was $34.35 in the 10am hour, on the CBOE exchange (so possibly the same trader), when 20,000 Sept 37 calls were sold to close at $1, or $2 million in premium collected, and rolled up to buying to open 30,000 of the Sept 40 / 46 call spreads for 90 cents, or $2.7 million in premium.  This new trade breaks-even at $40.90, up 19% from the trading level, with max gain of up to $15.3 million if the setf is $46 or higher on September expiration.