Follow the Smart Money to Earn 300% Profits on a Utility

Earlier this week I had the opportunity to give a couple presentations at the Las Vegas MoneyShow. If you aren’t familiar, the MoneyShow is a very popular conference held all over the country where you can learn about all types of investing and meet with all sorts of investment professionals. As you may imagine, the Las Vegas show is one of the most heavily attended.

Of course, my talks were all about options and I was extremely impressed at just how many people came to my sessions. The reason I was surprised is that I still think of options as a more of a niche investment product, perhaps not for everyone. I tend to the think that investors can get turned off by the initial complexity of options trading.

However, my own views are quite obviously antiquated. Judging by the crowd sizes and the savviness of the questions I was asked, options have definitely become part of many traders’ repertoires. As a 20-year options trading professional, I am extremely excited to see how many people are interested in learning and using options.

One topic I brought up in one of my talks was how I like to look at options block trades frequently to see what the smart money is doing. In fact, several attendees asked me about this subject. If you read my articles regularly, you know that I like to call out big options trades and either recommend doing the same trades or finding alternative ways of utilizing the trading strategies.

The main point of this practice is that large options block trades tend to be executed by firms with big capital. And, firms with big capital tend to hire very smart people who make well-educated and well-researched decisions on trades.

For example, let’s look at this gigantic vertical spread that hit my screener this week in NRG Energy (NYSE: NRG). NRG may be a large utility company (with a market cap around $10 billion), but it doesn’t trade a whole lot of options on a regular basis (roughly 11,000 daily average). So, when I saw 100,000 options trade in one trade, it obviously caught my attention.

The trade appears to be a bullish call vertical spread, rolled out and up from June to September, and expanded in size. In particular, the trader bought around 51,000 September 37 calls while simultaneously selling 51,000 September 40 calls with the stock at $33.70.

An out-of-the-money call spread like this is definitely bullish on the stock, and it is used to reduce the cost of the trade compared to just buying calls outright. In this case, the spread cost $0.75 in total or about $4 million for the amount of times it was executed. The trade breaks even at $37.75 on expiration, and maxes out at $2.25 profit if the stock goes above $40. By the way, that’s 300% profit at max gain.

In my opinion, $0.75 is a small amount to pay for a spread with 300% upside and about 4 months of time to work. As such, I like this trade as is, and if you are bullish on energy or utilities, this could be a nice addition to your options portfolio.

Trades like this – in stocks that don’t usually have a ton of options activity – are the reason I love looking at block trades regularly. It definitely provides some insight into what the smart money is expecting from certain stocks or industries moving forward.


— The Option Specialist

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About the Author: The Option Specialist