Trader makes a huge bet on energy rebound

Options Action: $4M bet on energy rally
Options Action: $4M bet on energy rally   

Despite the seemingly never-ending saga of low oil, one trader placed a big bet this week that one area of the energy market could soon make a major comeback.

Looking at the JPMorgan Alerian MLP ETN, the AMJ, that trader purchased 50,000 of the January 2017 30/40 call spreads for 80 cents each. Since each call option accounts for 100 shares, this is a $4 million bet that the AMJ will rise as high as $40 in less than 12 months. That's a near 90 percent move from where the ETN was trading on Thursday, around $21.

Shares of AMJ — whose top holdings include an array of energy names like Enterprise Products, Magellan Midstream, Williams Partners, Sunoco and ONEOK—have fallen 26 percent in 2016 and are sitting near five-year lows. Meanwhile, crude oil prices fell more than 3 percent to a 13-year low on Thursday.

Read More US crude falls on supply worry, weak demand outlook; Brent wobbles

"This is a very bullish bet on the energy space," Mike Khouw told CNBC's "Fast Money" on Wednesday. Khouw noted that the AMJ trade is targeting levels that the ETN hasn't seen since July.

"Another interesting thing about AMJ that is flashing a signal is the current yield, which is over 10 percent," added the Optimize Advisors president and chief strategist. "Usually a very high dividend is a warning sign that pending cuts are likely."

The collapse in oil has Wall Street worried that many energy companies would soon cut their hefty paying dividend yield. ConocoPhillips announced a dividend cut earlier this month. Shares have since tumbled nearly 20 percent.

Contact Options Action

  • Showtimes

    Fridays, 5:30p ET
    Saturday, 6a ET
    Sunday, 6a ET
  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Sponsored Related Links

More on thinkorswim by TD Ameritrade

  • Make sure you’re always keeping up with the market with up-to-the-minute news and breaking stories. Move on possible breakout stocks and options with potential opportunity. Plus, get in-depth analysis on futures and forex in one seamless, integrated experience. Join TD Ameritrade and trade commission-free for 60 days + get up to $600 cash.