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Perhaps the biggest story last week was the surge in the price of WTI crude oil to a two-year high over $57 per barrel. A lot of that move was due to what’s going on in Saudi Arabia, where a wide-ranging crackdown against corruption is causing significant instability.
Oil stocks, curiously, have not been moving up with the price of oil, and I think one of the reasons for that is that a lot of investors have been burned in this sector over the past several years. Stock prices of energy companies are just not increasing at the same rate as oil, so I see some bullish opportunities there.
I’d want to see sentiment improve before making any longer-term investments in that area. In the near term, however, I am opting for a bullish position involving Energy Select Sector SPDR (ETF) (NYSEARCA:XLE), a put credit spread:
Using a spread order, sell to open the XLE Dec. 15th $66 put and buy to open the XLE Dec. 15th $56 put for a net credit of about $0.30.
A put credit spread is a bullish position that involves writing (selling to open) an option and simultaneously purchasing (buying to open) an option at a different strike price in the same underlying security. The position, or leg, of the spread trade that you sell gives you a cash credit to your trading account. The option you buy limits your risk and lowers your margin requirement for the trade.
Ultimately, you want the underlying share price to stay above the upper strike price of the spread. In this case, we want XLE to stay above $66 through the Dec. 15 expiration. XLE is a very slow-moving ETF, so therefore you’re not making as risky of a play, and shares are well above our strike price. Unless oil falls apart very quickly, we should be in good shape here.
Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.
