Investors awoke in the New Year with an appetite for energy stocks. We’re only two days into 2022, and already the Energy Sector ETF (NYSEARCA:XLE) is up 6.66%.
What’s more impressive is that crude oil has only gained slightly over the same time frame. Yes, it’s up, but it doesn’t seem to be the primary cause for such a mad dash into energy stocks.
Instead, the key lies with factor rotation. Financial stocks also boomed to begin the year, suggesting investors favor value over growth right now.
With the jump, XLE rose to a fresh 52-week high. Two months of resistance melted in the face of Tuesday’s fiery flight. Volume swelled to confirm institutions entered the fray. This bodes well for the breakout’s chances to stick.
In surveying the sector, there was no shortage of quality trade setups. Here are my three favorites.
After the usual stroll through each chart, I’ll highlight how you can use an options strategy to profit.
3 Energy Stocks to Buy: Exxon Mobil (XOM)
We’re kicking things off with the king of energy. As the largest holding of XLE, Exxon Mobil most mirrors the sector ETF. On Tuesday, over 38.5 million shares changed hands, marking the highest volume up day since last March. Prices are now well north of all major moving averages and should push above last year’s peak in short order.
Given the momentum behind this week’s launch, I strongly suspect the next pause or pullback will get bought. You can wait for it or climb aboard here in case the rally persists for a while longer before sellers strike. Alternatively, you could enter half of your position here. Then wait for the inevitable dip to add the second half.
Implied volatility has descended to the basement and now lies at the 6th percentile of its one-year range. Options are cheap, suggesting buying premium is the smarter play here.
The Trade: Buy the March $65/$70 bull call spread for $2.
Devon Energy (DVN)
If the low beta nature of Exxon Mobil doesn’t speak to you, then take a look at Devon Energy. Its higher volatility has translated to serious outperformance over the past year. To wit: XLE gained 46% in 2021; DVN gained 179%. Thankfully, the ascent has been relatively orderly and created multiple clean entry points along the way.
This week’s pop lifted prices over $45 resistance, sparking another breakout. On the larger time frame, we now have clear air until $51, so a quick shot higher is a good possibility.
The higher volatility of DVN works to the advantage of options sellers. Using a naked put or put spread can juice the probability of profit while still pocketing a modest return.
The Trade: Sell the February $42 put for $1.20.
3 Energy Stocks to Buy: Marathon Oil (MRO)
Let’s round out today’s trio of energy stocks with a low-cost alternative. Marathon Oil is a sub-$20 stock with gains last year that echoed the sky-high returns of Devon Energy. For 2021, MRO rallied 148%. Bullish breakouts litter the landscape, and each brought enormous profits to traders willing to play. With Tuesday’s rally, prices are once again departing a multi-month range. If this follows the script of its predecessors, significant gains could be in store.
Marathon Oil shares are the cheapest of today’s offerings and thus the most appropriate for long calls and short puts. Since we already used the latter for DVN, let’s go with a long call play.
The Trade: Buy the April 17 call for $2.30.
On the date of publication, Tyler Craig was LONG XLE. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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