Oil & Gas ETF (XOP) Finds Bullish Option Interest Revival

Oil prices traded flat on Tuesday, but oil stocks and ETFs like XOP found a bid right after the open. As the price began to rally, so did the option interest and stock volume. This is an indication that the bullish movement in the energy industry may not be over as we head into 2021.

The current trend in the oil space was something that I was writing about in October. Unusual option activity was lining up, but the price didn’t gain any traction until November 9. Many times, when you see a potential trend reversal building, it requires some patience. In this case, it paid off getting long in October.

XOP Option Activity

On Tuesday, the call option volume for XOP was nearly 1.5 times the average as overall option volume lagged. Approximately 38% of the call volume was filled at the bid price and over 54% was filled between the market. The put-to-call ratio came in at 0.49. Here’s a closer look at the significant option activity:

• $50 put for 15 JAN 21 sold @ $0.85
• $62 call for 15 JAN 21 BOT @ $3.05
• $68 call for 15 JAN 21 sold @ $1.25

This 11,556 contract trade occurred all at one time and in one print. This is a bullish combination trade where the put was sold to help pay for the long call vertical spread. Since the $68 filled at market, the option volume skewed more toward the sell side. However, the inclusion of the $62 strike that filled between the market made the trade bullish.

With a net debit of $0.95, the breakeven for the trade is $62.95. A close above $68 by expiration will allow the trade to realize its max gain of $5.05 per share. While this trade has less than a 50% probability of making money by expiration, it has a significant reward-to-risk.

XOP Technicals

On December 4, XOP had a large breakout in its price as it made its highest close since June 10. The November 24 resistance near $60 was broken as the price closed above the 61.8% Fib retracement level. This is an indication of a full retracement back to the June 8 high near $72.

Tuesday’s rally faded late. However, it formed a bullish pattern as Monday’s bearish candle is sandwiched between two bullish candles. The price pattern coupled with the higher volume up-days helps provide an indication of buying support for the trend.

Conclusion

There is no certainty in the market right now and the move in oil could fizzle if demand stalls. However, the supply has moved back to the upper end of its 5-year range with production and imports down significantly from last year. This trade and the price movement shows some large bullish interest is betting that the move isn’t over yet.