A Half-Mil Bull Play On “Dirty” Energy

Hey Traders,

As everyone continues to wait (and wait … and wait …) on the passage of the $1.2 trillion infrastructure bill, there’s been lots of hype on green energy plays.

And rightfully so; the final iteration of the bill will likely have a significant number of provisions for greener and cleaner infrastructure and energy.

However … in the meantime … fossil fuels are still the name of the game, and there are still plenty of potential options trades to be made on the “not-so-clean energy” side of things!

Just ask this Big Money trader, who plunked down $460,000 to open a bullish spread on this natural gas name …

While Energy Transfer LP (Ticker: ET) may not quite be a household name, their subsidiary Sunoco (Ticker: SUN) sure is.

The natural gas and propane company controls tens of thousands of miles of domestic pipelines, with total assets worth about $95 billion.

Though ET definitely took it on the chin during the March 2020 COVID crash, the shares rallied steadily during the first half of 2021, and were tapping at their pre-COVID levels (though still quite a bit off their all-time high of $20.82 in 2015) before hitting sector-wide headwinds in July.

Chart courtesy StockCharts

However … someone out there with some deep pockets seems to think ET will be able to reclaim its perch near $11 by the beginning of next year …

Though they don’t seem to think it’ll be able to push much higher than that …

Long-Term Long Calls

You know I can’t get enough of Big Money order flow …

I think it’s just such a valuable tool to help you get a finger on the pulse of what Big Money investors – read: Smart Money – are really thinking.

Although you need to be careful to notice the nuances when you’re watching these unusual volume, spotting big trades can clue you in to potential headwinds or tailwinds that could be coming down the pipeline (no pun intended) for a particular stock.

So when I saw this ET trade cross the tape on Tuesday, I was intrigued.

This trader opened a call debit spread – also known as a long call spread, or bull call spread – by buying to open 20,000 contracts of the January 2023 11-strike calls for $0.35, while simultaneously selling to open the same number of contracts of the January 2022 13-strike calls.

By opening this bull call spread, we can assume that the trader is looking for ET to rally in the coming months.

However, the benefit to opening a call spread, as opposed to simply purchasing calls outright, is this trader was able to take what would have been a $700,000 outlay, and reduce it to “only” $460,000 by using the $240,000 credit from selling the 13-strike calls.

Lowering the initial outlay also lowers the trader’s breakeven from $11.35 to $11.23 – so technically, ET doesn’t even need to break over its mid-June high of $11.36 to make a profit.

It is interesting to note that ET’s 30-day at-the-money implied volatility (ATM IV) is in the bottom 2% of its 52-week range, indicating options on the natural gas name are almost the cheapest we’ve seen in a year.

Because this trader has ended up with a net debit to their account, an increase in ATM IV could work to their benefit by raising options prices.

But in this case, it is more likely they’re looking for an actual move higher, rather than higher anticipation of movement.

To me, this reads like someone with deep pockets – and therefore someone who potentially has knowledge the general public does not, whether that is through expert consultation, expensive trading tools, or a number of other “tools” Big Money traders have access to that retail traders don’t – thinks there’s upside to be had on this name. 

If you’re looking for a bullish energy trade yourself, this could be a name to have on your radar.

Of course, I certainly wouldn’t just go out and enter a similar trade, especially without doing my own due diligence, such as checking all aspects of the trade, finding the deeper story on ET, and analyzing whether or not this is the best trade to play this sentiment – but that’s a whole story on its own!

For this Deep Pockets Player, the best-case scenario would mean they walk away with a maximum profit of $3,540,000 (that’s the $2 difference between strikes less the $0.23 premium spent *100 shares per contract * 20,000 contracts).

Worst-case scenario? They lose their $460,000 premium paid, and end up empty-handed.

Your Only Option,

Mark Sebastian

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.