Energy bulls hit gusher in $XOP

Option traders turned quick profits today in the SPDR S&P Oil & Gas Exploration and Production Fund.

On Dec. 20, Investitute’s tracking systems detected the purchase of 20,000 February $37 calls for $0.84 and $0.85 with shares at $35.39. This was clearly fresh buying, as option interest in the strike was only 171 contracts before the trade occurred. Investitute co-founder Pete Najarian cited the unusual activity as well as heavy buying in the SPDR Energy Fund at that time on CNBC’s “Halftime Report.

Those calls sold for $2.15 at the end of today’s session, more than 2.5 times their original purchase price. The stock rose 7.9 percent in the same time frame, showing how quickly options can far outpace gains in their underlying shares.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

XOP was up 2.8 percent to $38.22 today. The exchange-traded fund has rallied with the rest of the energy sector as the price of oil has climbed to its highest level in more than 2-1/2 years.