Energy is the master resource, and the vital lifeblood of our modern economy. We all use energy, but not all of us use it to its full potential. I’m talking here about harnessing energy — not just to heat our homes or power our vehicles — but to boost our investment returns.
Thanks to the advent of exchange-traded funds (ETFs), it’s easier than ever to hitch your portfolio to the energy wagon. Two of my favorite energy ETFs are United States Oil (NYSE: USO) and the Energy Select Sector SPDR (NYSE: XLE). Both of these funds are pegged to the fortunes of oil prices, but each has its particular focus. And each offers many opportunities for options trading investors.
In the case of USO, the fund is designed to track the spot price of light, sweet crude oil. Futures contracts on light, sweet crude are the measure by which traders assess the supply, demand and price of this commodity, and they are regarded as the primary U.S. benchmark for crude oil prices.
The one-year price chart of USO clearly demonstrates the huge spike in crude prices since mid-February. Not coincidentally, that’s when tensions in the Middle East began to ramp up, and that was the catalyst for the latest surge in oil prices, a surge that has US drivers paying near to $5 a gallon in gas. Since that February low, USO has spiked nearly 26%. This is the kind of upside potential possible when investing in a red-hot energy sector ETF such as USO.
If you are a very aggressive investor comfortable with trading options, then you can potentially supercharge your oil returns via buying USO calls. For example, the USO May 2011 44 Call was up 11.5% on Thursday, April 21 alone, as traders bet on the continued run higher in oil prices.
Another way to bet on greater upside in the oil patch is to do so via the biggest and best corporate names in the space. Here we are talking about owning such stalwart firms as Exxon Mobil Corp. (NYSE: XOM), Chevron Corp. (NYSE: CVX), Schlumberger Ltd. (NYSE: SLB) and ConocoPhillips (NYSE: COP). These five oil giants make up the top five holdings in the Energy Select Sector SPDR (NYSE: XLE).
As you can see by the above chart, stocks that make up this exchange-traded fund have popped like an oil gusher ever since late-August. In fact, XLE has risen over 55% since falling to those August lows, a move that clearly reflects the nearly concomitant increase in oil prices over that time.
Now, a 55% gain in this energy ETF is certainly appealing, but even more appealing is the upside potential when using call options. Aggressive options players who expect the oil party to continue can look to the slightly out-of-the-money XLE May 2011 79 Call as a way to add more fuel to the energy sector fire.
Oil and energy stocks have been proven winners for the past eight months, and until the sector figuratively runs out of gas, these two ETFs — along with their respective bullish option’s trades — represent great ways to energize your portfolio.
As of this writing, Jim Woods held no positions in the funds mentioned in this article.