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An Election Play on Schlumberger

Ahead of today's presidential election, we noticed heavy call buying in the oil services sector. Call options on Schlumberger were particularly active yesterday, with 4.4 calls being bought for every put.

The biggest trade of the day was the purchase of 3113 January 77.5-strike calls for $0.59 each, which was done with the stock at $69.10. This trader is bullish on the stock, and expects it to appreciate by at least 13% before expiration in 73 days.

So why get bullish now?

Well for starters, the oil services sector, Schlumberger included, has lagged the S&P 500 this year on falling oil and gas prices, as well as on oversupply in North America. However, Schlumberger looks poised to outperform the sector going forward, due to its strong international presence. Schlumberger also generates $6.49 in cash per share, which has allowed it to consistently buy back shares and raise its dividend by 15-20% annually. This is likely to drive share appreciation over the long term— but in the short term, the stock is likely to be driven by the outcome of today's election.

The Romney campaign has been seen as pro-oil, and a Romney victory could mean that the government opens up more land to development by energy companies. This would benefit Schlumberger, which is a company that oil companies hire to develop and manage oil fields. Buying out-of-the-money call options on a high-quality oil services name like Schlumberger is a good way to play expectations of a Romney victory in the polls tonight, given the trade's fixed risk and its potential for unlimited profits.

Brian Stutland is the President of Stutland Equities and a contributor to CNBC's "Options Action."

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