Behind the $4 million bet on oil plunge

Options Action: $4M bet against oil and gas    6:06 PM ET Wed, 16 Nov 2016 | 03:01

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  Options Action: $4M bet against oil and gas   

  6:06 PM ET Wed, 16 Nov 2016
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Oil and gas stocks are up more than 27 percent year to date, but one trader is making a $4 million bet that the group will tumble by the end of this year.

After surging above 50 last month, crude oil has been pinned near $45, but according to Dan Nathan of RiskReversal.com, "what's really interesting about oil and gas stocks is that they show really strong relative strength." Crude oil is down about 12 percent from its mid-October highs; however, the S&P Oil & Gas ETF, XOP, is really close to its recent highs.

Even as these stocks have held up during increased oil volatility, it appears the options market is pricing in a move lower.

Nathan noted that in an eyebrow-raising trade on Wednesday, someone bought 93,000 of the December 33-puts for 42 cents each. That is a nearly $4 million bet that oil and gas stocks will fall below $32.58 by December expiration — 15 percent lower from current levels. "That's a long ways from here, especially if you consider how well these stocks are acting," Nathan explained.

Energy stocks have been on a massive downtrend from the 2014 highs, and are now right up against that $40 level. "So again, this may be a way out of the money, protection against the portfolio of energy stocks looking for a breakout."

The XOP was trading at the $38.60 range during Thursday's session.