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Hedge Funds Dump U.S. Energy Stocks to Buy Crude Options

Following a rally in energy stocks this year, hedge funds have been selling off U.S. oil company shares to pile into crude oil options, expecting a price rally in oil if the Middle East conflict escalates and a short-term pullback in energy shares, according to Goldman Sachs data reported by Bloomberg.

Money managers have sold U.S. energy stocks for three consecutive weeks, per Goldman Sachs's prime brokerage data.

Shares in energy firms have outperformed the top tech stocks this year as the market has grown more bullish on oil and crude prices rallied at the end of the first quarter and at the start of the second quarter. Energy company valuations continue to trade at discounts to the S&P index and the energy sector continues to be the cheapest in the market, attracting investors who are bullish on energy.

But some hedge funds have started to feel that the energy stocks rally may have gone too far and a pullback in the short term is imminent.

Therefore, some portfolio managers have been dumping energy stocks to pile up into crude oil call options to hedge their risks in case of an escalation of the conflict in the Middle East.

"Some of the hedge funds are selling oil shares, but since there's still quite a bit of geopolitical risk, it makes sense to buy some call options on oil to protect yourself to the upside," Frank Monkam, senior portfolio manager at Antimo, told Bloomberg.

At the same time, traders have flocked to the crude oil options market, trading record numbers of call options that Brent would hit $100 per barrel in the coming months.

There have even been bets on $250 oil in June.

About 3,000 lots of June $250 call options in US crude oil traded for just 1 cent each on Tuesday-trades that Bloomberg likened to a lottery ticket due to the unlikely event that it would actually pay out. If it were to pay out, however, it would pay out handsomely.

By Charles Kennedy for Oilprice.com

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Charles Kennedy

Charles is a writer for Oilprice.com More