3 Energy Stocks, 3 Ways to Make Bank on Oil

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By now, investors are keenly aware of the collapse in oil prices and energy stocks amid worldwide flooding of supply.

Make Money on Oil With Options on Energy StocksOil has fallen precipitously, and it is entirely possible that it will fall more. One of the terrible indications on the horizon is that, because the U.S. lifted sanctions on Iran, the country will begin shipping even more oil than it had been and hurt energy stocks even more.

The more supply there is, the lower prices will go. Nobody in OPEC seems content to just stop producing, even though the oversupply hurts everybody. While this is good in one sense for the U.S. economy, because lower gas prices means more money available for discretionary spending, it also means that energy stocks continue getting beaten.

I’ve always said you should have energy exposure in your long-term diversified portfolio. How do you handle this situation, though?

Using options on energy stocks is a good place to start, so here are a few ideas.

Energy Stocks: Energy Select Sector SPDR ETF (XLE)

Energy Stock Options: Energy Select Sector SPDR ETF (XLE)If you think oil prices are going to fall further, as I happen to believe, then one thing you can do is sell naked puts against energy stocks. I think using the Energy Select Sector SPDR ETF (XLE) is one of the energy stocks that work well with this strategy.

Here, you sell the right for someone else to “put” –- or force you to buy – the XLE at a certain price on or before the option expires. Obviously, they only do this if the price is below that strike price, since they will be selling the stock at the strike price.

XLE stock is trading at $57.15. Consider selling the Sept. 16 $53 naked puts for $3.90. You’ll collect $390 off the bat. If XLE stock gets put to you, it will do so at $53. Subtract the $3.90 you got paid and you buy the XLE at an effective price of $49.10 — 14% below today’s price.

Energy Stocks: Market Vectors Oil Services ETF (OIH)

Energy Stock Options: Market Vectors Oil Services ETF (OIH)Another way to go is with the Market Vectors Oil Services ETF (OIH). By concentrating on the oil services sector, you get exposure to the largest players in this all-important infrastructure space. Since you’ll be selling naked puts, you are attempting to get in on the sector at a lower price than it sells for today — $24.40.

By using options in this manner, you are hedging the present oil situation. If prices should rise, then you won’t buy OIH stock. However, you will make a little money, having sold the naked puts. If OIH stock falls below the strike price, you do buy the stock and the premium you received gives you a further downside hedge in case oil falls more.

The July 15 $21 naked puts are selling for $1.33. If put to you, you get OIH stock at an effective price of $19.67, or about 19% below today’s price.

Energy Stocks: Exxon Mobil Corporation (XOM)

Energy Stock Options: Exxon Mobil Corporation (XOM)Now I happen to prefer the diversified energy ETFs, because I’m not locked into one company. Any time you limit yourself to one company, you risk disaster if a disaster befalls it. Remember BP Plc (BP)?

Still, some people prefer individual stocks because they tend to outperform ETFs. In that case, you can go with several choices, but I like Exxon Mobil Corporation (XOM). It has weathered every type of economic disaster, and done so for decades, so I think it is probably the safest bet in the sector. It has also been the most resilient of the stocks.

XOM stock trades at $78.78. The July 15 $70 naked puts are going for $2.85. That gives you a potential entry point on XOM stock of $67.15. That’s about 15% below today’s price, near XOM stock’s 52-week low, and would suggest oil is in big trouble.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com. As of this writing, he owned shares of XLE and OIH.


Article printed from InvestorPlace Media, https://investorplace.com/2016/02/options-energy-stocks/.

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