Hey Traders,
The S&P 500 (Ticker: SPX) may be having a rough few weeks …
But one sector that hasn’t been feeling the squeeze is energy …
I mean, take a look at Energy Select Sector SPDR Fund (Ticker: XLE):
Chart courtesy StockCharts
Yes, it suffered a little bit of a late summer slump (haven’t we all …) …
But its rally over the last few weeks has pushed the shares even higher than the “COVID is over, time to travel!” euphoria that boosted oil prices in May and June …
And now that WTI crude oil is teasing the $80 mark, will energy stocks continue to see upside?
Let’s take a look at what Big Money thinks about these 3 energy names (and how I traded one of them)!
Ring Energy (Ticker: REI)
Ring Energy (Ticker: REI) has been having an even better “back-to-school season” (August and September) than XLE, with the shares hitting as high as $4.11 earlier this week, and currently sitting at $3.91 (a 114% gain from its mid-summer low of $1.81).
Chart courtesy StockCharts
Higher oil prices have been a boon for the drilling stock, who has initiated several well-drilling programs to be carried out over the next several months.
What are things looking like in the pits? On Friday, REI’s option volume was in the 96th percentile of its annual range. Put volume actually touched an annual high, although the put/call ratio is still only 0.58.
What kind of attention has REI gotten from Big Money this week?
On Tuesday, an unusually large lot of calls were sold to open, with 20,000 contracts of the December 5-strike calls sold for $0.35. This would have brought in about $700,000 in premium, and may seem like a bearish bet against REI …
However, it is more likely that this was actually call underwriting, meaning these calls were written to hedge shares this trader already owns. In that case, this trader is at least moderately bullish, seeing as they own REI shares, but the call writing at the 5-strike isn’t exactly a vote of confidence that REI’s latest move higher will continue at the same rapid clip.
Ovintiv (Ticker: OVV)
Hydrocarbon and natural gas producer Ovintiv (Ticker: OVV) has also had a strong performance over the last few months, and its chart doesn’t look all that different from REI’s … just with higher prices.
The shares are up 75% from their summer low, closing at a two-year high on Friday at $38.41.
Chart courtesy StockCharts
Among options traders, OVV’s pits are much more call-skewed than usual, with OVV’s put/call ratio of 0.04 in the bottom 2% of its annual range.
However … OVV’s pits aren’t exactly hopping, and a huge amount of the action we’re seeing comes from just a handful of customers.
On Monday, this trader closed out a lot of 3,000 October 34-strike calls for $1.75, and immediately purchased 4,000 contracts of the October 37-strike calls for $0.70. Their closeout not only completely subsidized the cost of the 37-strike calls, but they were even able to walk away with $83,000 in hand.
I noticed another large block of trades cross the tape on Wednesday that seemed to go against this bullish sentiment, however. One trader purchased 16,867 contracts of the January 38-strike calls for $3.30, while selling the same number of the January 50-strike calls for $0.80, creating a call debit spread. While that would normally appear to be a bullish move, this trade was actually tied to a short stock sale, which actually indicates this particular Smart Money is quite bearish.
Then on Friday … what did we see?
Another trader (presumably the same as the first) sold 4,000 contracts of the 38-strike calls at $1.60, and went long on 2,500 contracts of the November 41-strike calls for $2.25. It seems this trader thinks OVV will continue to extend its leg higher in the weeks ahead.
However, as I often do with Big Money, I felt there was a better way to make this trade, and Ovintiv was actually the Big Money Flow trade made during live session – specifically, I bought the OVV November 19, 39-strike calls for $2.90 with a $3.00 top. You can watch the replay of that live session right here.
William’s Companies (Ticker: WMB)
Nat gas name William’s Companies (WMB) has also enjoyed the sector tailwinds, albeit with a more muted reaction than OVV and REI.
The shares are up 22% since their August low, and WMB closed the week trading at $28.28, extending its string of six-year highs.
Chart courtesy StockCharts
The William’s pits have been busier than usual, with option volume sitting in the 94th percentile of its annual range on Friday.
The shares were on the Smart Money radar this week. On Tuesday, I caught a trader who purchased 5,000 contracts of the January 2022 31-strike calls for $0.39. By the close on Friday, these calls were trading for $0.45, and there’s still plenty of time left on the clock for WMB to extend its rally.
However, another Smart Money trader likely doesn’t want that to happen too quickly. On Friday, a lot of 4,984 November 26-strike puts, and the same number of November 30-strike calls, both for $0.30, creating a short strangle position.
With WMB currently smack in the middle of that strangle range, it seems someone out there is hoping the latest string of all-time highs slows its pace over the next few weeks.
Your Only Option,
Mark Sebastian
