Marathon Oil is the third-best performer in the S&P 500 this year, and options traders seem to think it will keep running.
Check out this large complex trade in the Houston-based energy driller:
- 15,423 January 24 calls were sold for $6.70.
- 15,423 January 21 puts were bought for $0.63.
- Volume was below open interest in both contracts, which suggests a large investor closed existing positions.
More transactions occurred at the same time:
- 15,423 January 32 calls were purchased for $2.19.
- 15,423 January 25 puts were sold for $1.33.
- Volume exceeded open interest in both. That suggests a trader opened new positions.
The transaction generated a credit of $5.21. But what does it mean? The matching times, sizes and open interest suggest that an institutional holder is using options to create a bullish “synthetic position.” While complex and risky for individual investors, the transaction illustrates the power and flexibility of options.
Calls and Puts
Calls fix the level where investors can purchase a security, so they tend to appreciate when prices rise. Puts are the opposite, gaining value to the downside. Traders can also sell puts to generate income. That’s similar to owning stock because short puts have a positive delta.
Monday’s trade combined long calls and short puts. The result is a leveraged position controlling 1.53 million shares for a fraction of the upfront cost. The investor can profit on both halves if MRO continues to advance: The calls stand to gain value and the short puts can depreciate.
However there is significant downside risk because they’re obligated to buy shares for $25 if prices are below that level on expiration.
MRO ended Monday’s session up 1.1 percent to $29.47. Its peak in 2022 is near $32. The choice of calls near that level could suggest traders view it as a potential breakout zone.
The trader probably opened the position when MRO was trading at a lower price. Monday’s roll let him or her take some profits while remaining exposed to potentially further upside.
Aside from generating leverage, the strategy can help large portfolio managers manage their portfolios. The short puts effectively create a buy order below the current price, letting the investor know they’ll get filled on a pullback. It also ensures they won’t miss a big rally.
The large transaction pushed MRO’s option volume above 83,000 contracts. That’s more than triple the daily average in the last month, according to TradeStation data.
Options trading is not suitable for all investors. Your TradeStation Securities’ account application to trade options will be considered and approved or disapproved based on all relevant factors, including your trading experience. See Characteristics and Risks of Standardized Options. Visit www.TradeStation.com/Pricing for full details on the costs and fees associated with options.