Oil gave up multi-month gains yesterday, but a large trade remains bullish on Range Resources.
Although OPEC production cuts began as scheduled over the long New Year weekend, crude pulled back from an 18-month high as the dollar rebounded yesterday morning. Nevertheless, our market scanners detected the following three-way trade in the late afternoon:
- 2,500 June 35 calls were bought for $2.75 against open interest of 36 contracts,
- 2,500 June 40 calls were sold for $1.35 against open interest of 60 contracts,
- 2,500 June 28 puts were sold for $2.05 and $2.10 against open interest of 1,008 contracts.
The strategy combines a bullish vertical spread with short puts. The call spread is looking for RRC to rally above $35 by expiration. The sale of the higher-strike contracts reduces the cost of the long calls but limits potential gains, as the trader will be obligated to sell shares if they rise above $40. The sale of the puts further lowers the cost of the spread, but the investor will face an obligation to buy shares if they fall below $28. (See our Education section)
RRC fell 5.12 percent to $32.60 yesterday and is down 11 percent in the last three months. The oil and natural-gas producer reported bullish quarterly results on Oct. 25 and is expected to release its next earnings numbers after the close on Feb. 23.
Overall option volume in RRC was 3 times greater than average yesterday.