Options players target XTO calls, bet on more gains

By Doris Frankel

CHICAGO, Aug 11 (Reuters) - Investors snapped up call options in XTO Energy Inc (XTO.N) on Monday, with many betting that the U.S. oil and gas producer's stock will extend gains heading into the autumn months.

The Fort Worth, Texas-based company's stock rose $1.09, or 2.46 percent, to close on Monday at $45.40 on the New York Stock Exchange.

The bullish option order flow follows a positive comment in an article in the latest edition of Barron's.

The sharp drop in oil and natural gas prices has produced an even sharper pullback in energy stocks, creating what may be one of the best buying opportunities in the sector in several years, according to Barron's.

Energy issues have rarely been so inexpensive, relative to oil and gas prices, estimated asset values and earnings, according to the Barron's article. Barring a collapse in oil and gas prices, most energy stocks could easily rise 25 percent or more over the next year, the weekly financial newspaper said.

Shares of major independents like XTO Energy now trade at little more than half their net asset values, noted Simmons & Co analyst David Kistler, according to the Barron's article.

Option analytics firm Trade Alert data showed about 47,000 call options, giving buyers the right to buy XTO shares at a given price and time, traded vs. 10,000 puts, which allow participants to sell XTO stock at a preset price and time.

EYES ON NOVEMBER

Most of the call volume involved large block trades in the November contract, which had all the signs of a substantial bull call spread. At least one options strategist believes XTO shares will move higher between now and November, said option strategist Frederic Ruffy at website WhatsTrading.com.

The trade marked the second time in the space of a week that option traders have used large-sized call spreads to position for upside price action in November, said Interactive Brokers Group option analyst Rebecca Engmann Darst.

The trade on Monday involved a 15,000-lot spread between the November $45 and $55 strikes, with the trader buying the lower strike for $4.40 a contract and selling the upper strike for $1.50, absorbing a $2.90 debit that would require XTO shares to break above $47.90 to break even, Darst said.

The sale of the upper strike in the spread implicitly caps upside expectations -- so the trader is not looking for shares to penetrate the $55 level, she added.

"The general takeaway from this is that option traders with the wherewithal to make large bets are confident about the prospect of a sustained, if limited, turnaround in XTO's share price heading deeper into the autumn months," Darst said. (Editing by Jan Paschal)