Energy Select Sector SPDR (ETF): Get Energized With a Bullish Position in XLE

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Stock watchers looking to get in on the commodity comeback, take note. Energy stocks, oil stocks and a broad swath of other equities linked to the oil patch are setting up low risk entries. The Energy Select Sector SPDR (ETF) (XLE), arguably the king of energy stock exchange-traded funds, is predictably pulling back after its scorching run.

Yes, even the mightiest recoveries can’t escape the pull of profit-taking. While downturns annoy shareholders by whittling away at recent gains, they are a godsend for sidelined spectators looking to get in on the game. Before this week the only option available to those wishing to jump aboard the XLE train was to chase.

And chasing a runaway train is fraught with peril. Such a venture inevitably results in a few bumps and bruises in the form of swift losses when the inevitable pullback materializes. Better to wait for the retracement, then strike when the risk has diminished.

XLE
Click to Enlarge
Source: OptionsAnalytix

We’re seeing just such a setup materialize in the XLE ETF. So far, XLE has retraced 4%, a mild drop given its recent gains.

If the bears press their advantage, the popular energy stock ETF could fall further until support comes into play.

Watch for the 20-day moving average as well as prior resistance — which should now act as support — coming in at the $58.75 level. A retest of either level will provide quite the attractive buy-the-dip opportunity.

XLE Stock Options Strategy

Despite the budding recovery in XLE, demand for options remains elevated. Consider selling bull put spreads to exploit the pumped-up premiums.

Sell the April $55/$52 put spread for 45 cents. The bull put consists of selling to open the April $55 put while buying to open the April $52 put. The max reward is limited to the initial 45 cent credit and will be pocketed if XLE sits above $55 at expiration.

The max risk is limited to the distance between strikes minus the net credit, or $2.55, and will be lost if XLE sits below $52 at expiration.

If you think the energy stock dip will continue for another day or two, consider pulling the trigger after the retracement has exhausted itself.

At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/03/xle-energy-stocks-options/.

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