Not all call buying is created equal. That was the lesson from Whiting Petroleum yesterday.
optionMONSTER's Heat Seeker monitoring program detected the purchase of about 6,500 January 35 calls in the first 30 minutes of trading. Most of them priced for $1.90.
That kind of activity would usually be bullish because long calls lock in the price where investors can buy a stock and will gain in value in a rally. They reflect underlying demand and can shoot up if their underlying shares rise, but buying calls is not the best strategy when a stock has been dropping quickly.
"You want to be selling shorter-dated contracts to collect premium, especially when they're out of the money," said Ron Ianieri, chief instructor at optionMONSTER Education . The reason is that options lose value more quickly as expiration approaches, so those January contracts could lose money even if the stock works higher.
Whiting initially climbed yesterday but soon reversed and ended the session down 3.79 percent at $28.93. The Denver-based oil and gas company has lost more than two-thirds of its value since the summer amid a broad selloff in the energy sector.
"A drastic change in momentum like that is a hard bet," Ianieri added. Most of his trades in the energy space have been long-term bets on higher-quality companies. He also does the opposite of Thursday's trade by selling shorter-term contracts to help pay for longer-term paper. (Click here to sign up for optionMONSTER's Education program .)
Yesterday's total option volume in Whiting was triple its daily average, with overall calls outnumbering puts by more than 20 to 1.
More From optionMONSTER