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The Bulls Want to Run With SM Energy

David Russell|Writer, OptionMonster
Sunday, 1 Jul 2012 | 2:53 PM ET

OptionMonster’s tracking systems detected a giant upside trade in SM Energy, the wildcat oil company, which operates in Texas, Louisiana, and the Rockies.

Seth Joel | Photographer's Choice RF | Getty Images

It entailed the purchase of 10,000 November 55 calls for $4.05, while equal-sized blocks were sold in the November 70 calls for $1.10 and the November 35 puts for $1.80. Volume was more than triple open interest in all three strikes.

Buying calls lock in the purchase price for a stock, while selling calls fixes the exit level. Selling puts obligates the investor to buy shares if they fall to the strike price or below.

As a result, the investor paid $1.15 to enter the position. He or she will collect $15 if SM rallied back to $70, representing a profit of more than 1,200 percent. In addition to the initial outlay, the trader also stands to lose money on the short puts if the stock falls below $35.

SM shares rose 7.16 percent to $49.11 on Friday, but came into the session down by more than one-third during the preceding three months. Most energy stocks have been hammered in that time amid worries of financial contagion from Europe and a slow recovery in China. That sentiment has improved markedly in the last week as investors jump into beaten-down names in the sector.

Friday’s bullish trade in SM pushed total option volume in the stock to 24 times greater than average.

—By CNBC.com Contributor David Russell

Additional News: Why Oil’s Rebound May Not Signal Major Trend Reversal

Additional Views: Option Bulls Set Sights on Magnum Hunter

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David Russell is a reporter and writer for OptionMonster. Russell has no positions in SM Energy.

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