The stock market has been turned upside down. For months, energy stocks have been getting crushed while the rest of the market held firm. Now, the broad market is getting slammed and the energy sector refuses to go down.
It’s about as bullish a sign as possible for beaten-down, left-for-dead energy ETFs like the SPDR Oil & Gas ETF (XOP).
And it reeks of selling exhaustion. Energy stocks have already been brought low. The fluff has already been extracted, the optimism removed. With XOP already pricing in Armageddon, it’s no wonder the ETF shrugged off China’s currency devaluation news.
The sudden relative strength out of the XOP ETF isn’t the only positive development lately. We’ve also seen a bullish divergence arise out of the popular RSI momentum indicator. While XOP formed a lower pivot low last week, the RSI was carving out a higher pivot low, suggesting the momentum of XOP’s downtrend is waning.
If the oil and gas fund can break above short-term resistance at $40 we’ll have a full-fledged trend reversal on our hands. Color me impressed that this may transpire while the rest of the world is melting down.
In light of the ongoing destruction being dealt to energy stock prices, the implied volatility for XOP options remains elevated. The IV rank sits at a somewhat lofty 60%, making option premiums an attractive sell here.
Get Naked With XOP Puts
The higher IV, coupled with XOP’s cheaper price tag, makes selling naked puts an alluring proposition. Sell the Sep $34 put for 55 cents.
Consider it a bet that the XOP ETF will remain above $34 for the next month. Should the puts expire worthless, you’ll pocket the max reward of 55 cents.
By shorting the put, you obligate yourself to buy 100 shares of XOP at $34. Since you received 55 cents premium, your cost basis would actually come out to $33.45. If you’re looking to accumulate shares of XOP down here anyways, you could simply ride to expiration and allow assignment if XOP tumbles below $34 by expiration.
Otherwise, I suggest simply bailing by buying to close the put if XOP returns to its weak-sauce ways and declines below $34.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
