Oil prices are rebounding and one trader is now making a big long-term bet that a slightly under-the-radar energy name will see gains over the years to come.
Energy infrastructure company Kinder Morgan is up 7 percent in the past month while crude bounced 32 percent higher. But over the past year, the stock climbed 29 percent even as crude prices were slashed in half. A recent transaction in the options market shows that there are traders who see Kinder Morgan's uptrend continuing.
On Thursday, volume on the stock's bullish options as eight times their average. The bulk of that was in one transaction. A trader bought 50,000 contracts of the 50-strike call options with January 2017 expiry for $1.20 each. To offset a portion of the costs, the trader simultaneously sold the same amount of the 60-strike for 20 cents each.
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Since each contract controls 100 shares, the trader is betting a total of $5 million that Kinder Morgan will trade above $51—or at least 17 percent higher than Thursday's close—in the next 21 months. The trader makes the most money should shares hit $60. A call is a bullish wager giving its purchaser the right to buy a stock at a given price by a set date.
According to options expert and CNBC contributor Mike Khouw, Kinder Morgan's change in corporate structure from a master limited partnership to a corporation.
"Usually, you would just buy the stock and collect your dividends but they got rid of that structure last year," explained Khouw. "Now it looks like people are saying, 'OK, either we can have lower for longer or there's actually some upside profit potential' as they're going to try to look at opportunities in the energy space."
Yet those looking to collect dividends may find Kinder Morgan's relatively attractive, especially as global interest rates remain low. Not only is the company the fourth-largest stock in the S&P 500's energy sector—with a market cap of $94 billion—its current dividend of 4.4 percent makes it the fourth highest-yielding stock in the sector.
