The insanity in the oil market continued Monday. Crude broke below $50, and shares of most energy stocks and ETFs continued to get slammed.
It’s times like this when puts and calls are of particular interest to traders and investors alike, on the both the long and short side of things.
Both puts and calls can come in handy here, as well as more complex multileg options. There’s an infinite variety of ways to play energy stocks using puts and calls, and your move depends on your current energy positioning.
If you don’t happen to have any position in energy stocks right now, you have to ask yourself whether you want to try and make some money on the short side, or wait for things to settle down and go long.
If you already are long energy stocks, you’re probably still sitting on gains (albeit smaller gains now) but want to protect what you have left by hedging your position. Heck, you may even want to average down using your current holdings.
Let’s look at a couple big-name energy holdings and how you might play them using puts and calls right now.
Energy Select Sector SPDR (ETF) (XLE)
In my case, I have a small position in the Energy Select Sector SPDR (ETF) (XLE), where I am about breakeven. With crude at $50, this basket of top-name energy stocks is high on my list for ETFs I’d like to increase my position in.
XLE trades near $76 as I write. I suspect there’s more downside to oil, probably until at least the next OPEC meeting in June. I don’t want to sell calls against XLE in case oil has a short-term rebound, though. If anything, I’d like to add to my position, so selling naked puts is the way to go here.
The Mar 20 $74 puts are selling for $3.30, thanks to all the market volatility. These puts would net me a huge 4%-plus premium based off the strike price, and if units of XLE do get put to me, I’m getting them for $70.70, which is almost 7% below the current price.
That’s a perfect way to average down.
iShares Transportation Average ETF (IYT)
I also hold a small position, currently breakeven, in the iShares Transportation Average ETF (IYT). I like the transports ETF because it is a diversified basket of stocks that should benefit from lower oil prices, even though they aren’t specifically energy stocks.
In this case, the expectation is that transport stocks will rise in the medium term. I’d like to add to my position, but the market as a whole has been under assault the past few days. In this case, do I go with puts or calls?
I am considering two possible moves in IYT, which currently trades at $159. The first is to sell naked puts — in this case, the Feb $157 puts, which are selling for $3.50. That’s a 2.2% return based on the strike price, and a nice return in the absolute. If the shares get put to me, that will be at an effective price of $153.50, almost 4% below the current price.
The other move is to sell the Feb $159 covered calls, which are selling for a very attractive $7. I earn 4.4% on my position, and if the stock looks like it’s going to be called away, I can just buy back in.
As of this writing, Lawrence Meyers held XLE and IYT. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs. Contact him at pdlcapital66@gmail.com and follow his tweets at @ichabodscranium.
