Trading Nation

How one trader lost more than $2 million in a week by betting against oil stocks

Drilling down on energy stocks

As crude oil surged on Wednesday following OPEC's agreement to cut production, the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks companies that are highly levered to oil prices, rose more than 10 percent — and that was very bad news for one big options trader.

Wednesday's biggest options trade in any ETF was the apparent sale of 86,227 December 35-strike puts on the XOP at a price of $0.12 per share, or $12 per contract.

The $1 million this generated may sound like a lot of money, but everything is relative. On Tuesday, Nov. 22, roughly the same amount of December 35-puts appeared to be bought, for about $0.40 per share — or a total cost of nearly $3.5 million.

That means that the trader lost some $2.5 million in just over a week.

The way the bearish trade was structured, profits would be generated if the XOP closed below $34.60 on Dec. 16. Another way of making money would be selling the puts ahead of expiration, which would have been profitable thanks to some mix of a drop for the XOP and an increase in options values.

That's not the way events actually transpired, of course. Not only did the XOP surge following the OPEC decision, but now that the big catalyst is in the rearview mirror, the general prices of the ETF's options have cratered — a double-whammy for the onetime holder of these puts.

Perhaps some consolation may be found in the money that was saved by selling the puts in the morning. While they were executed at a price of $12 per contract shortly before 10 a.m. ET, as the day wore on, the value of those puts fell as low as $4.