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Trader tries to make millions on energy rebound

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Options Action: Energy stocks to rally?

Sliding crude oil prices have punished energy stocks. But one big trader appears to think it's high time to get in on the sector, in the form of the SPDR Energy Select ETF (ticker symbol: XLE).

In a huge trade Wednesday, one firm bought 10,000 of the December 90/95/100 call butterflies for 63 cents per share. This somewhat complex trade consists of the purchase of the December 90-strike call, the sale of two December 95-strike calls and the purchase of a December 100-strike call. The sweet spot for this trade is at $95, because at that level the trader will enjoy all the upside from owning the 90-strike call, without being punished by being short the 95-strike calls.

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If the XLE is at $95 at December expiration, the trader will make $4.37 per share. Given that this trade was put on 10,000 times, for a total cost of $630,000, the trader could make $4.37 million—a $3.74 million profit in under two months.

Gas prices at a station in South Orange, New Jersey, October, 2014.
Marty Steinberg | CNBC

Why put on such a complex trade? For Dan Nathan of RiskReversal.com, the high price of options on the Energy ETF provides the impetus for this butterfly structure.

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After the sharp decline in oil prices, the price of options on the XLE rose sharply, "and they're still very elevated," Nathan said Wednesday on CNBC's "Fast Money." "This trade structure alleviates that potential decay of owning long premium if you get the move in the direction that you want."

In other words, because this trader is short as many options as long, the success of the bet does not depend on options prices remaining high.

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