SM Energy attracts huge leveraged bet

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The bulls want to run with SM Energy.

Our 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. (See our Education section)

As a result, the investor paid $1.15 to enter the position. He or she will collect $15 if SM rallied back to $70, representing a profit of more than 1,200 percent. 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 percent 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.

(A version of this post appeared on InsideOptions Pro on Friday.)



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


This article appears in: Investing , Options

Referenced Stocks: SM

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