Equity traders make counter-intuitive bets on OPEC surprise

PARIS (Reuters) - Some equity traders have been buying up 'call' options on shares of oil majors ahead of Thursday's OPEC meeting, betting the cartel will spring a surprise cut in output to revive crude prices.

The trade idea - which has very limited risk since it uses derivatives instead of buying shares - is a bet that sentiment toward the sector has become excessively negative and oil shares are ripe for a technical rebound if OPEC members opt for a bigger-than-expected output cut.

Phoebus Theologites, chief investment officer at SteppenWolf Capital, recommends buying calls on oil stocks "as a proxy for cheap exposure" to a potential rebound in crude prices.

"In order to further reduce the option premium, one could buy such an option on an oil-company basket or, even better, a listed ETF (exchange-traded fund)," he said.

"The high but nevertheless imperfect correlation between the constituents of the basket or ETF results in lower overall implied volatility, thus reducing the premium further."

The price of crude oil has tumbled 30 percent since June and most predictions for the OPEC meeting are for a small cut in production or no action at all.

Recent activity in the derivative market, however, shows that a number of traders are turning more positive about the outlook for the sector.

"Option volumes suggest investors are using call options to position for leveraged upside rather than buying puts for protection," Goldman Sachs derivative analysts wrote in a note.

On Europe's Eurex market, the ratio measuring the number of negative 'put' options versus bullish 'call' options on shares in the STOXX 600 energy sector index <.sxep> has dropped in the past three weeks, to 1.4 currently from 3.4 in early November.

Spanish oil company Repsol , seen as one of the most resilient oil majors in Europe, features among the stocks with the lowest put/call ratio, currently at 0.1.

Barclays derivative strategists recommend positioning for a potential rally in Repsol via calls ahead of the OPEC meeting "when we cannot rule out a surprise announcement on oil supply," they wrote in a note.

The stock has gained 17 percent since hitting a low in mid-October, outperforming the sector's 10 percent rally over the same period, helped in part by a rating upgrade to 'buy' from 'neutral' by Goldman Sachs.

However, Vincent Cassot, head of equity derivatives strategy at Societe Generale, is sceptical on the risk/reward of such a strategy.

"If you believe in a rebound, it's a relatively cheap way to play it. But you may end up paying the premium for nothing if there's no rebound following the meeting," he said.

(Additional reporting by Saqib Iqbal Ahmed in New York; Editing by Susan Fenton)