A Low-Risk Entry Beckons for Oil Stocks (XOP)

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This week’s bout of profit-taking has delivered some mighty attractive setups. Leading stocks and sectors that were otherwise too stretched for proper entries have now been brought low.

A Low-Risk Entry Beckons for Oil Stocks (XOP)And with yesterday’s successful defense of key support levels by bulls, the time to strike is nigh.

A survey of the major sectors reveals energy stocks continue to reign supreme. The two most popular exchange-traded funds in the space are the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) and the SPDR S&P Oil & Gas Explore & Prod. (ETF) (NYSEARCA:XOP).

Both demand the attention of dip buyers here.

We’ll focus on the latter, XOP, in today’s missive. The late-September pop in crude oil lit a fire under energy stocks, driving XOP up a solid 13% in the process. This week’s three-day drop is the first low-risk setup that has materialized since the oil rip.

XOP ETF

Source: OptionsAnalytix

The recovery in XOP has been sufficient in turning all major moving averages at this point. We all knew it was only a matter of time before the energy space finally recovered from last year’s destruction. And with the slow-moving 200-day moving average now pointing higher, it’s fair to say the technicals are finally flashing green lights across the board.

The first line of defense for uptrending stocks is typically the rising 20-day moving average. Tests of this smoothing mechanism reveal the aggressiveness of buyers. And, at least for XOP, this week’s test was passed with flying colors. Thursday’s reversal for XOP commenced right at the 20-day suggesting the underlying bid in oil stocks remains alive and well.

If you missed the last upshot in energy stocks, now’s as good a time as any to initiate new positions.

The XOP Option Trade

The lower price tag and elevated volatility of XOP make it a prime candidate for put selling.

If you’re willing to bet that the oil & gas ETF remains above $35 for the month ahead, sell the Nov $35 put for 58 cents. The reward is limited to the initial credit and will be pocketed provided the put sits out of the money at expiration.

By selling the put, you obligate yourself to buy 100 shares of the fund at $35 if it happens to drop that low by expiration. Traders wishing to sidestep assignment could simply buy to close the option if XOP tumbles to $35.

At the time of this writing Tyler Craig owned naked puts in XOP.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/10/spdr-sp-oil-gas-explore-prod-etf-xop-stock/.

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