Not all sectors were bereft of buyers during Thursday’s drop. The gusher in oil prices had traders rushing into energy stocks all day long.
By days end, the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) was up just shy of 2%, notching a new 52-week high in the process. Heavy volume accompanied the XLE resistance breach, suggesting institutions were among the aggressors.
What began as a rebound from extremely oversold levels has morphed into a full-fledged trend reversal for the energy sector. And I’m not just referring to its minor trend.
The ongoing ascent for XLE has been sufficient in turning the intermediate and now major trend higher. Just look at the 200-day moving average of late. First its descent slowed. Then it bottomed. And now it’s rising ever so slightly.
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The turnabout has been gradual but beautiful. Hesitant bottom-fishers waiting for multiple signs of confirmation that the energy patch has officially reversed needn’t wait any longer.
The game is afoot, friends, so jump in and start playing.
The XLE Revival Trade
The options market offers choices aplenty for gaming further strength in energy stocks. Vanilla call buys beckon to the simpletons and speculators while call spreads await for the cautious.
And, yes, like virtually every other sector and stock these days, XLE boasts dirt cheap options. The energy sector ETF has an IV Rank of zero which means calls and puts can be purchased for their cheapest prices of the year.
If you’re looking to keep things simple consider buying the Dec $70 calls for around $3.50. The risk is limited to the initial $3.50 debit while the reward is unlimited. Think of it as a cheap bet on additional upside in energy stocks for the rest of the year.
If the $3.50 price tag isn’t cheap enough, or, if you simply want to hedge off your time and volatility risk, consider selling short-term calls against the Dec $70 call. Buy the Dec $70 call while selling the Oct $73.50 call. This diagonal spread can be purchased for around $2.60.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
