Two ways to express a view on a stock or a given industry in the financial markets are to buy it (long) or sell it (short). However, investors can gain leverage in these bets to amplify their returns should they get their views' direction and timing right. This is done through stock options, but there is a caveat to trading these instruments.
Investors should be aware that the leverage and timing aspect of options creates a lot of added risk over just owning and trading an individual stock. That is why they should pay attention to high-conviction trades in these products since the stakes are that much higher for those placing these underlying bets. Today, some traders choose to go with put options, which profit when and if the underlying asset declines in price by a certain date.
These traders went in heavily for put options in areas like the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP) in the energy sector, as well as the broader Energy Select Sector SPDR Fund (NYSEARCA: XLE), and even the SPDR S&P Metals & Mining ETF (NYSEARCA: XME) as a bet against the basic materials sector. For reasons that will become clear in a minute, investors should be wary that these traders may have just made the wrong bet.
Energy Stocks Will Dominate in 2025
[content-module:Forecast|NYSE:OXY]There is a reason Warren Buffett decided to keep buying shares of Occidental Petroleum Co. (NYSE: OXY) as he started selling some of his other holdings, such as his most controversial sale in Apple Inc. (NASDAQ: AAPL). The reason is simple: the United States economy is about to ramp up domestic production, and that means oil demand.
Looking at indicators like the manufacturing PMI index, investors can see how the manufacturing sector in the United States has pushed a two-consecutive month expansion, building up potential momentum in oil. Not only that, Asia’s powerhouse (China) is also pushing out more PMI expansion readings this quarter.
The world’s two largest economies now offer investors a clear path for higher oil demand, which could create trouble for put buyers unless they buy these options as a hedge against owning the underlying ETFs.
Also, considering how much oil prices have fallen behind other leading commodities, like gold, creates the potential for a fundamental opportunity in a catch-up. Not only is economic activity lining up to give investors a new reason to get into oil, but so are the spreads and limits in the industry itself.
More recently, investors have seen institutional buyers like the Vanguard Group boost their holdings in a drilling name like Transocean Ltd. (NYSE: RIG) as of February. After a 1.2% boost, the group now holds a stake worth up to $295.5 million today, or 9.0% ownership in the company.
Insiders Haven’t Given Up
[content-module:Forecast|NYSE:GOLD]As of this quarter, the management of gold mining company Barrick Gold Corp. (NYSE: GOLD) decided to approve a large stock buyback, signaling underlying confidence in the continued strength of the company’s sales and earnings in this environment. Needless to say, gold’s rampant uptrend this year is only going to help themes like this one expand.
With this in mind, investors can see how these put option buyers might be betting on the wrong side of the market today. However, the optimism in mining activity and earnings didn’t stop at the individual stock level, as other buyers also trickled in for the mining ETF.
As of February 2025, allocators from Bank of America decided to boost their metals & mining ETF holdings by as much as 24.4%. After this recent addition, the bank has now built up a stake of up to $139.5 million, or 7.2% ownership in the fund.
With bullishness emerging from the energy and basic materials market, it becomes evident to investors that these put option traders are wrong to believe that these areas will be headed lower in today’s environment.
More than that, according to this post, Wall Street analysts as a whole are bullish in the overall basic materials sector, quoting some of the global market developments already discussed today. When and if these traders are forced to close their puts positions, that event might ignite a new wave of confidence, creating even more bullish momentum.
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