Bulls Want to Run With SM Energy

By David Russell, reporter at OptionMonster

NEW YORK -- The bulls want to run with SM Energy ( SM).

OptionMonster's tracking systems detected a giant upside trade in the wildcat oil company, which operates in Texas, Louisiana, and the Rockies. It entailed the purchase of 10,000 November 55 calls for $4.05, while equal-sized blocks were sold in the November 70 calls for $1.10 and the November 35 puts for $1.80. Volume was more than triple open interest in all three strikes.

Buying calls lock in the purchase price for a stock, while selling calls fixes the exit level. Selling puts obligates the investor to buy shares if they fall to the strike price or below.

As a result, the investor paid $1.15 to enter the position. He will collect $15 if SM rallied back to $70, representing a profit of more than 1,200%. In addition to the initial outlay, the trader also stands to lose money on the short puts if the stock falls below $35.

SM rose 7.16% to $49.11 on Friday but came into the session down by more than one-third during the preceding three months. Most energy stocks have been hammered in that time amid worries of financial contagion from Europe and a slow recovery in China. That sentiment has improved markedly in the last week as investors jump into beaten-down names in the sector.

Friday's bullish trade in SM pushed total option volume in the stock to 24 times greater than average.

Russell has no positions in SM.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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