The level of bearishness around oil stocks has become "extreme," and it's time to play for an energy snapback. So argues Goldman Sachs' options team, which goes on to recommend a bullish play on energy stocks.
Examining options market pricing, Goldman's John Marshall and Katie Fogertey observe that nervousness about increased oil-price declines have shot up, as more and more investors appear to have taken to the options market to hedge their exposure or to make outright bearish calls.
Marshall and Fogertey grant that such positioning indicators are of limited use when it comes to making long-term calls. But in the near term, any shift in position is likely to be a "tailwind."
In order to play for a sentiment-driven spike, the strategists recommend buying calls on the SPDR Energy Sector ETF (XLE). Specifically, they recommend buying the March 58-strike calls for $1.30 per share — a bet that will pay off if the energy ETF rises above $59.30 by mid-March, which is 10.5 percent above Wednesday's closing price.
Societe Generale macro strategist Larry McDonald says that such a trade makes sense.
Given the high levels of capitulation, "there's a high probability of a 10 to 20 — maybe even 30 — percent bounce here, so your risk-reward today is very good."
Not everyone is on board.
Todd Gordon of TradingAnalysis.com says that with options prices relatively expensive (as Goldman points out), it might be smarter to sell options rather than buy them.
If one insisted on making bullish play, then, Gordon would recommend selling put options rather than buying call options.