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Options Bulls Call Bottom in Oil Prices

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DiscoverGold   Friday, 05/31/19 04:12:58 PM
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Options Bulls Call Bottom in Oil Prices
By: Schaeffer's Investment Research | May 30, 2019

Traders have been buying to open out-of-the-money June calls this week

OIH is off more than 27% from its late-April peak

U.S.-China trade tensions have sparked a sell-off in oil prices recently, with the front-month July-dated contract shedding roughly 13% since its April 23 close at $66.24 per barrel -- last seen at $57.53 per barrel. This weak price action has been seen in the VanEck Vectors Oil Services ETF (OIH), which is off more than 27% over this same time frame and down 1.3% at $13.52 today. Nevertheless, options traders appear to be calling a bottom for the energy exchange-traded fund (ETF) -- even as it heads into a historically bearish period.

With about two hours left in today's trading, nearly 27,000 OIH calls are on the tape -- 1.7 times the expected intraday amount, and double the number of puts exchanged so far. The June 15 call is most active, due in part to a 7,500-contract block that was likely bought to open for 13 cents apiece, or $97,500 (number of contracts * premium paid * 100 shares per contract).

This also represents the most the call buyer stands to lose, should OIH settle below $15 at the close on Friday, June 21, when the front-month options expire. Profit, meanwhile, will accumulate on a move above breakeven at $15.13 (strike plus premium paid).

This is the second day in a row OIH call options have seen heavier-than-usual activity, with new positions purchased at the June 14.50 calls on Wednesday. More broadly speaking, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 1.80 calls for each put over the past 20 sessions.

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