Options traders are signaling that energy could be one of 2021's hottest plays

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Options traders are betting that the energy trade could be about to catch fire in the new year, even as the S&P 500 energy sector is on pace to fall nearly 40% in 2020.

Oil itself has dropped more than 20% this year, but despite an uncertain coronavirus vaccine rollout schedule and the ongoing demand fears surrounding the global pandemic, traders are betting that one of the biggest names in the space can make up quite a bit of the ground it lost this year by the end of 2021.

“We were taking a look at Exxon, this is a name where we saw calls outpacing puts by [a ratio of] about 5 to 1, and the most active options were the January 2022 52.5-calls. Over 13,000 of those traded for about $2.66 on average,” Michael Khouw, chief investment officer at Optimize Advisors, said Monday on CNBC’s “Fast Money.”

Those calls break even at a stock price of $55.16, or roughly 31% higher from where the shares closed out Monday’s session. The stock has fallen from $70.90 to roughly $42 this year, so those calls represent a bet that Exxon Mobil can recover about 50% of those losses throughout the next year and into early 2022.

Despite those outwardly bullish bets, there is a bit more than meets the eye when it comes to how Exxon trades in the options market, as Khouw would point out.

“The options markets still look a little bit reticent, they are still forecasting a dividend cut as a significant possibility going into the new year,” said Khouw.

Exxon was trading slightly lower in Tuesday’s session.

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