One of the most interesting “smart money” trades we came across yesterday was with Energy Select Sector SPDR Fund (NYSE: XLE).
If you’re new here, a “smart money” trade is a relatively large volume option trade most likely made by a pro trader. The idea is to analyze unusual options activity, identify an interesting “smart money” trade, and then make our best guess as to:
- Which direction the trader thinks the stock is headed
- How much they think it will rise (or fall), and
- In what time frame this will all happen.
If we like what we see after putting all these pieces together, we can mimic the “smart money” trade (on a smaller scale), and potentially ride alongside our pro trader to profits. With all this in mind…
A Pro Trader Just Bet $5,621,000 that XLE Will Continue to Climb in the Next 4 Weeks
On Friday, December 17, 2021, a pro trader seems to have bought 3,850 of the January 21, 2022, $40 call options on XLE for $14.60 per contract. Her outlay was $5,621,000.
Interestingly, there seem to be multiple option trades done for XLE yesterday, for the same strike price and expiration date, with the total amount translating to multi-million dollars.
XLE – Option Trades
The trade’s breakeven point is at $54.60, meaning that XLE needs to rise to $54.60 for the call option trade to break even. This is near the stock’s previous close of $54.37. And then for every $1 the stock rises above $54.60, our “smart money” trader will make $385,000!
On analyzing the daily chart of XLE, the stock seems to have broken out of a flag pattern (marked as blue color lines). This breakout level would now act as a strong support area. The stock is also trading above gap support, which is marked as a pink color dotted line. All this makes it likely that our pro trader is bullish on XLE.
XLE – Daily Chart
This lends credence to our conclusion that the pro bought these call options, as opposed to selling them.
If you agree and would like to mimic this trade, here’s how:
Buy to open the January 21, 2022, $40 call options on XLE for $14.60 or better.
As always, depending on your risk appetite, do remember to set a stop-loss for the options trade to avoid significant losses.
Happy Trading!
— Trades of The Day Research Team
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