CHICAGO (TheStreet) -- Reports that efforts to control the oil spill in the Gulf of Mexico failed over the weekend are sending oil and gas names such as Anadarko Petroleum (APC) - Get Report way down on the day, but one investor decided to load up on longer-dated calls on a bet that the stock could experience significant upside before the year-end.
APC shares were down more than 18%, or roughly $9.48, to $42.87 as of 3.29 p.m. EST, showing weakness along with the rest of the oil and gas sector. Despite the dip in APC shares, options action suggests one investor bought a hefty number of out-of-the-money (OTM) calls in anticipation of upside during the next six months.
At roughly 2:08 p.m. EST, a large block of November 55-strike calls changed hands for $2.65 per contract. More than 10,000 of these OTM calls have traded versus current open interest of just 227 contracts, indicating the majority of this volume was most likely initiated to open.
The premium of these calls was closer to the ask price when the trade hit the tape, suggesting investors bought these calls expecting the stock to be trading at least 30% higher at November options expiration.
By expiration, if APC shares climb higher than the breakeven price of $57.65 (the strike plus the premium paid), the call buyers could theoretically make unlimited profits to the upside. If the stock remains below the breakeven level, this long call trade caps maximum loss at the premium paid, or $2.65 per contract.
Implied volatility of the November 55 calls is 50% compared to the stock's 30-day historical volatility of 46%.
We know the investor traded the large block outright, meaning the long call action was not tied to stock. If the price of the options appreciates with or without a significant rally in the shares, the call buyers could choose to sell back the options and take profits instead of holding them until expiration.
-- Written by Jud Pyle in Chicago.
Jud Pyle, CFA, is the chief investment strategist for Options News Network. Pyle started his career in finance in 1994 as a derivative analyst with SBC Warburg. After four years with Warburg, Pyle joined PEAK6 Investments, L.P., in 1998 as an equity options trader and as chief risk officer. A native of Minneapolis, Pyle received his bachelor's degree in economics and history from Colgate University in 1994. As a trader, Pyle traded on average over 5,000 contracts per day, and over 1.2 million contracts per year. He also built the stock group for all PEAK6 Investments, L.P. hedging, which currently trades on average over 5 million shares per day, and over 1 billion shares per year. Further, from 2004-06, he managed the trading and risk management for PEAK6 Investments L.P.'s lead market-maker operation on the former PCX exchange, which traded more than 10,000 contracts per day. Pyle is the "Mad About Options" resident expert. He is also a regular contributor to "Options Physics."