Energy stocks are rallying hard on the heels of the plunging greenback. Of the major U.S. sector funds the Energy SPDR (XLE) led the pack on Tuesday, up 1% on the day.
The timing of the sudden surge is quite fortuitous. XLE has undergone a not-so-small pullback over the past month led by weakness in top holdings Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX). All told, the energy-centric fund has shed some 6%, bringing it to rest on the trendline that has defined its northward march that commenced mid-January.
You’ll find fellow energy based funds like the Oil & Gas ETF (XOP) and Market Vectors Oil Services ETF (OIH) are boasting similar patterns.
Interestingly, the weakness in the energy sector has occurred during a period of rather stable oil prices. While crude oil has been able to maintain its gains accumulated over the past few months by hovering in the $60 zone, the XLE ETF has given back roughly half of the ground gained during the oil rebound.
I suspect, however, the decoupling of XLE and oil will be short-lived. If crude can continue trending higher energy stocks will eventually be dragged along taking the XLE with them.
Score Income With XLE Put Spreads
Rather than betting on a big rebound in the energy space, the higher odds approach is to structure a position the profits provided XLE doesn’t fall much further in the coming month.
Sell the Jul $75/$71 put spread for 50 cents or better. Consider it a bet that XLE remains above $75 by July expiration.
The maximum reward is limited to the initial 50-cent credit and will be captured if the puts expire worthless.
The maximum risk is limited to the distance between strikes minus the net credit, or $3.50, and will be lost if XLE falls below $71 by expiration. To limit the loss consider closing the trade by buying back the put spread if XLE falls below $75.
At the time of this writing Tyler Craig owned bullish positions on XLE.
