In tracking Institutional and Unusual Options Activity one of the most important things to do is to look for themes. Often this is seen sector-based, seeing unusual call activity across a group, often seen in Gold Miners, Airlines, Solar, and Home Construction before the groups make a big multi–month run.
Today a theme was seen in the Oil & Gas Exploration and Production sector with 9 different names seeing large complex option spreads (PXP was late yesterday as the 10th). All of these spreads involved selling downside puts to buy either calls, vertical call spreads, or ratio call spreads.
All of the spreads were Delta Positive, Gamma Negative, Theta Positive, and Vega Negative.
The trades are structured to take advantage of a slow grind higher, as the upside in the ratio spreads is capped before the spreads start to lose money, and lower volatility and the decay with time work to these spreads advantage.
All of the spreads also traded with a large block of stock, and my view is that these spreads are being used as stock replacement strategies, selling puts at a level that is a value you are willing to be long the stock again, while also owning upside exposure for a move higher, the best case scenario being a move higher in which the puts expire worthless and the call spreads have value.
Many of these companies have substantial exposure to Natural Gas, so these positions are effectively calling a bottom as companies cut production to stabilize prices, but also realizing prices have modest upside potential. M&A could also provide a lift to this group with Foreign Oil very interested in acquiring US Shale Assets and many of these names trading near multi-year lows.
Chesapeake Energy (CHK) could be a name to attract M&A interest, a name that has seen 50,000 January 2013 $35/$45 far OTM call spreads bought at $0.35 to open in the past week.
I prepared an Excel sheet detailing each of the trade, and also one detailing some of the key stats for the names involved in these trades.
I personally like CRZO, DVN, and XEC at these levels. If concerned with ratio spreads for margin purposes, butterfly spreads are another way to play an upside grind in these calls. A safer route is to utilize bull put spreads in these names, and some may wish to sell puts outright, willing to be long stock, following the Smart Money.
Many ways to trade based off this “intel”, hope it helps you make some money!
Pioneer Natural Resources (PXD) with a seller of 2,500 March $90 puts to buy 2,500 March $105/$115 call spreads for a net $0.40 credit, similar to what was seen in the other names.