Big Trade Sees Bottom in Energy Giant: Options Recap

Big Trade Sees Bottom in Energy Giant: Options Recap

Energy stocks are bouncing from long-term lows this year, and one big investor has called a bottom in a key servicing name.

Schlumberger (SLB) touched a 13-year low under $35 last month. Today, a large block of puts got sold at that level as a trader looked for the stock to remain above that level.

Roughly 25,000 March 35 puts changes hands halfway through the morning. The first blocks priced for $0.57 but then premiums fell to $0.55. Volume was more than 20 times previous open interest at the strike, which indicates a new position was initiated.

Puts fix the price where investors can sell a security, so they typically make money to the downside. Advanced traders (like today’s) can also take the opposite side of the strategy, collecting income now in return for agreeing to cover other market participants in the event of a drop.

Schlumberger (SLB) chart, with relative strength indicator.

The technique benefits from capturing time decay. While similar to owning shares, it doesn’t require a rally to make money. Its risk? Virtually unlimited downside if the shares break under the strike price. (See our Knowledge Center.)

SLB rose 1.16 percent to $41.72 in late morning trading. It’s bounced along with the energy sector in January as oil crude rebounds from a 38 percent selloff in the fourth quarter.

Today’s trade comes two days after bullish call buying in oil and gas producer Devon Energy (DVN).

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.