Options traders are capitalizing off the misfortunes of the energy sector, taking bearish bets on the oil services exchange traded fund. Investors can hedge against further weakness in oil industry through inverse ETF options as well.
A large options trader rolled a position in the February 34-puts down to a position in the April 30-puts on the Market Vectors Oil Service ETF (NYSEArca: OIH), reports Alex Rosenberg for CNBC. OIH was trading around $34.4 per share Thursday.
A put option contract allows the owner to sell an underlying security at a specified price within a certain time, such as a $34 strike price with a February expiry date.
Mike Khouw on CNBC pointed out that a trader bought 20,000 February 34-strike puts on OIH and exited the position Wednesday. Subsequently, the trader acquired 30,000 April 30-strike puts, which suggests he or she is betting on an continued weakness in the oil space.
ETF investors are already evincing skepticism over the oil sector’s outlook as traders pulled $58.2 million out of OIH so far this month, according to ETF.com data.
For those with a high conviction of further weakness in the energy space, investors can consider inverse ETF options as an alternative to options trading. The United States Short Oil (NYSEArca: DNO) tracks the opposite moves of the West Texas Intermediate crude oil futures, ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) tries to reflect the two times inverse or -200% daily performance of WTI crude oil, VelocityShares 3x Inverse Crude (NYSEArca: DWTI) takes the three times inverse or -300% performance of crude oil, PowerShares DB Crude Oil Short ETN (NYSEArca: SZO) tracks the simple inverse of oil, and PowerShares DB Crude Oil Double Short ETN (NYSEArca: DTO) takes also follows a -200% performance of oil.
For the equities side, the ProShares Short Oil & Gas (NYSEArca: DDG) tries to reflect the inverse, or -100%, daily performance of the Dow Jones U.S. Oil & Gas Index. The UltraShort Oil & Gas ProShares (NYSEArca: DUG) takes two times the inverse, or -200%, daily performance of the Dow Jones U.S. Oil & Gas Index. Lastly, the Direxion Daily Energy Bear 3X Shares (NYSEArca: ERY) reflects three times the inverse, or -300%, daily performance of the energy select sector index.
Potential inverse and leveraged ETF traders should be aware that these funds may diverge from their target strategy of the long-term due to compounding issues from daily rebalancing. [Do You Know How Your Leveraged ETFs Work?]
Market Vectors Oil Service ETF
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