It's time to bet on a big energy rally: Goldman

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.

Read More Gusher of supply keeps pounding oil prices

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 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.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

Read more