Hey Traders,
In spite of record profits in the oil industry, on the charts, in recent days, many oil stocks aren’t looking quite as strong as you might expect …
But will this trend stick?
Or will oil stocks rally, and resume their months-long journey higher?
According to this Big Money trade, things might be looking up for one petrol company …
Petróleo Brasileiro (Ticker: PBR) is a Brazilian state-owned oil and natural gas company, which has spent months climbing steadily higher …
But has seen its share price falter in recent weeks, as the oil sector has been fraught with controversy and subject to the forces of geopolitical turmoil.
After pulling back for three straight sessions, PBR closed on Monday at $13.63, down 1.8% on the day …
But Big Money bulls seem to think the petrol giant will find a floor soon …
And they’re looking for a move higher to boot!
Check this out …
On Monday afternoon, one trader decided to open a massive bullish call ratio spread.
They purchased 100,000 May 13 14.5-strike calls for $0.33 … a buy that would normally carry a price tag of $3,300,000 …
But this trader simultaneously sold 200,000 May 13 15.5-strike calls for $0.13.
This means the trader was able to use their call sale to subsidize $2,600,000 of the cost of the purchased calls …
However, selling an additional 100,000 contracts of calls certainly opens this trader up to quite a bit of risk, as well.
And Big Money may not always make the smartest trades (like we do in Big Money Flow) …
But they certainly aren’t total dummies.
So to help hedge off some of this risk, the trader also bought 1,000,000 shares of PBR at $13.58 – a move worth $13,580,000!
What does this do?
It helps this trader reduce their directional risk by neutralizing the heavy delta associated with the ratio spread made just moments before.
An option’s delta tells you how much value the option will gain or lose with a $1 move in the underlying.
So, for example, if you have an XYZ option with a 25 delta (0.25), that means your option will go up or down $0.25 for every $1 XYZ moves.
This represents directional risk, because the value of your options will go up or down when the underlying stock moves, and many traders with massive positions don’t want to be open to the accompanying massive risk.
So they hedge their delta.
In this case, by purchasing 1,000,000 shares of PBR, this trader has helped negate how much they are risking in the event that PBR makes a large move.
The catch with delta management like this is that it can be quite expensive (as you can see above), and it requires the trader to actively manage their position, because an option’s delta changes all the time.
That’s why this is a tactic that is generally reserved for Big Money – institutions that have the time and resources to use delta management strategies.
Of course, while this does help negate Big Money’s risk, it doesn’t negate the bullish sentiment their call spread indicates …
How is it working out for them?
On Wednesday, the shares managed to tack on a slight gain for the day – 0.4% – to close at $13.21, though at the open on Thursday they were once again looking weak.
Luckily, this trader’s bullish notion still has several weeks to play out …