Play the Bounce in Energy Stocks With the XLE ETF

Advertisement

The oil price plunge dominated the landscape this week. Renewed selling in crude delivered destruction to energy stocks far and wide. Everything from Exxon Mobil (XOM) and Chevron (CVX) to Halliburton (HAL) and Schlumberger (SLB) were taken behind the woodshed.

The damage is easily seen by a brief survey of the trio of top energy stock exchange-traded funds: the Energy SPDR (ETF) (XLE), SPDR S&P Oil & Gas Explore & Prod. (ETF) (XOP), and the Market Vectors Oil Services ETF (OIH). Of the bunch, XLE boasts the most liquidity, so we’ll use it for today’s analysis and trade idea.

Since peaking north of $71 during its October recovery attempt, XLE has been brought low dropping as much as 14% before finally showing signs of bottoming in yesterday’s trading session.

While painful for those already invested in the XLE ETF, the energy stock slide does have a silver lining — it’s providing yet another attractive opportunity for spectators to try their hand at gaming a potential bottom in the energy patch.

You can chalk the attractiveness up to two primarily developments.

XLE
Click to Enlarge
Source: OptionsAnalytix

First, XLE is officially oversold increasing the likelihood that at least a short-term low is near.

Matter of fact, we’re getting confirmation of just such a bottoming bid with yesterday’s intraday reversal and today’s follow through. Secondly, the sharp downturn has kicked up demand for XLE options once again.

The implied volatility for XLE now sits at 54%, placing it in the upper half of its one-year range and making both calls and puts ripe for the selling.

Trading the XLE ETF

The logical play here is to short out-of-the-money put vertical spreads in XLE. Sell the Jan $57/$53 put spread for 50 cents or better. The spread is positioned to deliver the max gain of 50 cents if the XLE ETF can simply remain above $57 for the next month.

The max loss is limited to the distance between strikes minus the 50 cent credit, or $3.50, and will be lost if XLE tumbles below $53 by expiration. To minimize the damage you could always jump ship if XLE takes out major support at $59.

At the time of this writing Tyler Craig owned bull put spreads in XLE.

More From InvestorPlace

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2015/12/energy-stocks-xle-etf-options/.

©2024 InvestorPlace Media, LLC