Some U.S. equity options traders are betting that the recent rebound in the price of crude oil spells good news for the battered energy sector.
The S&P energy index is still down about 9.9 percent this year, making it the second worst-performing sector among S&P's tracking indexes. That contrasts against the broad benchmark S&P 500 stock index, which is up 6.9 percent for the year.
Recent trading in the options market, however, shows traders putting on bullish bets in both options on exchange traded funds exposed to the energy market and individual stocks.
"The commodity has sort of turned and bounced off the low around $46 and with that you've had an obvious bid to the upside," said Jim Strugger, MKM Partners derivatives strategist said about the price for a barrel of crude oil.
Brent, which fell to a five-month low of $46.64 last week amid concern over slowing demand, a rising U.S. dollar and increasing U.S. crude output, has recovered some ground.
Large drawdowns in U.S. inventories and growing support for continued output cuts by the Organization of the Petroleum Exporting Countries boosted confidence that a seemingly insurmountable glut might finally diminish.
Strugger pointed to the United States Oil Fund LP, VanEck Vectors Oil Services ETF and Energy Select Sector SPDR Fund, as energy-related funds where the options market was showing a bullish bias.
For the United States Oil Fund, there are 1.1 calls open for every open put, the most since late March, highlighting traders' bullish bias, according to data from options analytics firm Trade Alert.
"If oil rises to the top end of its recent range or even stabilizes within this range, the energy sector could do a little bit better," Strugger said.
Bullish options on individual stocks have also been in demand.
Ensco Plc, Nabors Industries Ltd, Patterson-UTI Energy Inc, Encana Corp
, Diamond Offshore Drilling Inc and Superior Energy Services Inc are some stocks that have drawn near-term upside positioning, Christopher Jacobson, derivatives strategist at Susquehanna Financial Group, said in a note on Thursday.
"There are a lot of incredibly burned-out energy names that could be good for a real bounce," MKM's Strugger said.
The Organization of the Petroleum Exporting Countries meets on May 25 and will discuss extending its agreement forged with a number of its rivals, including Russia, late last year to cut output by 1.8 million barrels per day in the first half of 2017.
Reporting by Saqib Iqbal Ahmed