Energy's recent rally is just a head fake, say options traders

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Options traders bet energy stocks are in for more pain

Oil's three-month-long roller-coaster ride still isn't over.

On Tuesday, it looked like crude was on its way to its first five-day winning streak since July, but then President Donald Trump fired national security advisor John Bolton – a well-known Iran hawk – and black gold immediately fell into the red.

Oil looks like it's on the road to recovery Wednesday, but if options traders are to be believed, energy stocks might not share in the comeback. Optimize Advisors President Michael Khouw stopped by "Fast Money" to explain why Tuesday evening.

"Looking at XLE, the energy sector ETF, we saw about two times the average daily put volume today," Khouw said.

With many of those puts being bought to open, it's no surprise that the largest trade of the day was a bearish bet.

"One of the trades that I was looking at was the Oct. 11 weekly 60.5-strike puts. Somebody spent about $1.30 for those," noted Khouw.

The XLE closed Tuesday at $60.92, meaning that this trader expects the ETF to drop at least 3%, or below $59.20, during the next month.

"Energy stocks tend to track oil, and oil often has a tendency to move further, farther along, than you normally would expect," said Khouw, "But in this case, we're still trading well within the band of its 52-week highs and lows.

"I think what's going on here, if you take a look at the tenor of the trade, and the relatively close strike, is [the buyer] is probably just playing for short-term volatility and taking this boost that we've seen recently in energy stocks as a trading opportunity to make a bet that it might actually dip within the next four weeks or so."

That may turn out to be a prescient bet. Energy stocks haven't exactly lit the market on fire this year. The XLE is up just 7% in 2019, well underperforming the broader markets, so a bet that recent strength may turn out to be a head fake might just pan out. An ongoing trade war and rising global recession risks would seem to support that.

The XLE was higher in Wednesday's session.

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