WhatsTrading Recap - 02/03/2015

The month of February is off to a good start. After a late-day spike yesterday, the S&P 500 has added another 23.91 points to 2044.76 Tuesday. It is now up 2.5% in the past two days and has trimmed its year-to-date loss to just 14 points.

Treasury bonds are under pressure as money rotates back to equities. The long end is facing the brunt of the selling and, after falling to new lows of 2.25% Friday, the yield on the 30-year jumped to 2.37%.

CBOE Volatility Index (VIX), which tracks the expected or implied volatility priced into a strip of S&P 500 Index (SPX) options, reflects the drop in risk perceptions as well. The market’s “fear gauge” is off 1.69 to 17.74 and has dropped more than 5 points from the intraday high Monday.

Overall options volumes remain light, however, with roughly 7.9 million calls and 6.3 million puts traded across the exchanges. Projected volume of 16.1 million contracts is 5% below the recent daily average.

There’s a lot of interest in the energy sector, as it’s a busy week for earnings from the group and as crude oil continues to rip higher – recently up $3.12 to $52.69.

In fact, one of the biggest options trades of the day was in the SPDR Energy Fund (XLE). This fund and eight others (XLU, XLK, XLI, etc) collectively hold all of the components of the S&P 500 Index. XLE holds, you guessed it, all of the energy names.

XLE is on a four-day surge and is up 2.8% to $80.04 late-Tuesday.

In morning options action, an investor bought 55,000 June 84 calls on XLE for $2.70 and sold 55,000 June 89 calls at $1. In other words, they bought the Jun 84 – 89 call spread for $1.70, 55000X, for a net cash outlay of $9.35 million.

The XLE Jun 84 – 89 call spread for $1.70 offers upside exposure to the energy sector and has an expiration breakeven at $85.70 (lower strike, plus debit paid), which is 7.1% above current level. The potential payout is $3.30 (diff. between the two strikes minus debit) and the premium paid is at risk if shares hold below $84 and the options expire worthless. However, a call spread can be closed or adjusted any time prior to the expiration as well. In short, the investor is risking $1.70 to make $3.30, or on 55,000 risking $9.35 million to make $18.15 million. Go energy…