A Risky Bet On An Energy Market Bottom…
No doubt about it, things have gone from bad to worse in the energy space. West Texas Intermediate (WTI) crude oil recently slid to $26 a barrel thanks to ongoing global oversupply issues.
Making matters worse, natural gas is sliding back towards multi-year lows under $2.00 mmBtu on the looming shoulder season.
Fact is, energy commodities are still stuck in one of the steepest downturns in decades. As a result, companies producing these assets are likely stuck between a rock and a hard place. Look no further than the recent rash of de-listings and bankruptcies in the energy space as proof.
Despite all this bearishness, one trader thinks the bottom in energy is at hand…
Late last week a well-heeled investor made a surprising bet on a looming energy market rally. He/she purchased 50,000 of the January 2017 $30/$40 call spread in the JP Morgan Alerian MLP ETN $AMJ.
In case you’re unaware, $AMJ is exposed to the oil and gas pipeline and storage industry. The ETN holds a number of top midstream MLP names like Magellan Midstream $MMP, Williams Partners $WPZ, and Enterprise Products Partners $EPD.
One look at a chart of $AMJ and you’ll understand the pain this industry is enduring…
As you can see, the past year has been an unmitigated disaster in the midstream energy space. $AMJ has lost 23% since the start of 2016, and nearly 50% over the past year.
But by betting a cool $4 million on the $30/$40 call spread, someone thinks $AMJ is about to have a turnaround of epic proportions. Remember, a call spread is a bet a certain asset will be priced above the lower strike ($30) and below the upper strike ($40) by expiration, in this case January 2017.
To put it simply, our trader is betting $4 million that $AMJ sees a rally of at least 28% over the next 10 months.
But to maximize profitability in this trade, $AMJ will need an upward thrust of around 70% from current prices. That’s no small feat considering the ongoing fundamental headwinds in the crude and natural gas markets.
Should you follow in this trader’s footsteps?
While there’s a good chance of oil price stabilization over the next few months, a 70% rise in $AMJ is unlikely. Keep in mind, the ETN is still stuck in a steep downtrend. So any continued decline in price only makes the rally needed for profits that much bigger.
Here’s another important point…
This isn’t the first time we’ve seen big bullish option bets in the energy space the past few months. In early December 2015, a trader made a $1.4 million bullish call option bet in Occidental Petroleum $OXY.
Unfortunately, $OXY careened sharply lower in December and January, which made that trader’s $1.4 million evaporate into thin air.
While this bullish big money option bet in $AMJ is exciting, take it with a grain of salt. The energy space is still in dire straits and will be for the foreseeable future.
Until Next Time,
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at http://commoditytradingresearch.com/free-sign-up.