Crude oil was volatile Friday and so were shares of oil service companies. Crude oil spiked more than $4.00 to a high of $128.60 in midday trade on reports Israeli Deputy Prime Minister Shaul Mofaz warned that Iran's nuclear program was near a "major breakthrough" and his country should "prepare for every option." The news seemed to create visions of escalating military tensions in the Middle East and possibly tighter crude oil prices. However, after the initial spike, crude edged back lower to settle the trading session near $125.00 a barrel.

The move took the Oil Service HOLDRS for a ride. The fund, which holds shares of in sixteen oil drilling and service companies, opened for $192.93 a share and hit a morning high of $198.54 before falling back down to $194.55. While OIH did add $1.51 on the day, at least one player in the options market seems to expect the sector to run out of fuel soon. In afternoon trading, with the Oil Service HOLDRS trading for $193.50, this strategist appears to have opened a substantial butterfly by selling 31,000 of the OIH September 185 puts for $7.70, buying half as many (15,500) of the September 175s at $4.6 and 15,500 of the September 195s for $12.25.

The activity has all of the signs of a bearish butterfly spread, which will make its best profits if OIH drifts down to $185 (the short strike) by options expiration. The strategist is paying a net debit of $1.45 per fly, which is the amount at risk if OIH doesn't fall into the profit range, between $176.5 and $193.5 by September options expiration.