$XOP bulls cash in enormous profits

Option traders are racking up huge gains in the SPDR S&P Oil & Gas Exploration and Production Fund.

On Aug. 21, Investitute’s tracking systems showed that 29,000 Weekly $31 calls expiring this Friday were purchased for $0.42 to $0.46 as part of a bullish combination trade with shares at $29.19. These was clearly fresh buying, as open interest in the strike was a mere 55 contracts before the activity appeared.

Today those calls sold for $2.79, more than 6 times their purchase price. The stock rose 15.7 percent in the same time period, illustrating the kind of leverage that can be achieved through options.

Long calls lock in the price where a stock can be purchased, gaining with a rally and providing leverage to the underlying shares. The contracts can quickly lose value if the stock stalls or pulls back but also carry less risk than owning the shares themselves.

XOP rose 2.91 percent today to cloes at $34. The exchange-traded fund appears to be breaking out as oil trades above $52 a barrel for the first time since May.