Crude oil was surging to a new 7-year high on Wednesday. And it’s mighty impressive given the destruction seen elsewhere. The muscle-flexing is buoying energy stocks, and many are also pushing to multi-year highs alongside the commodity. So today, I’m going to share three of my favorite ones to buy.
When building a bullish case for the energy complex, one thing that stands out is how utterly untouched oil was during this week’s rout in risk assets. The selling was indiscriminate, with just about everything seeing liquidation. Fear ruled the day, sending the CBOE Volatility Index (CBOEINDEX:VIX) nearly to 40.
And what did oil do during the panic? In an impressive feat of relative strength, it only fell around 1% from its peak on a closing basis.
No wonder energy stocks were the first to rebound and scored the most significant gains. If you think the outperformance continues, there are three ways to profit.
Let’s look at each chart to see why these three made the cut.
Energy Stocks to Buy: Energy Sector (XLE)
I’m an advocate for simplicity in trading. The easiest way to bank on energy stocks isn’t to pick an individual company. It’s to purchase the entire sector via a broadly diversified exchange-traded fund, or ETF. That way, you get whatever the sector is willing to give. You won’t outperform, but you won’t risk underperforming either.
XLE boasts the cleanest trend of any sector right now. Monday’s sharp decline was quickly bought up at the 20-day moving average, confirming dip buyers are alive and well. But, of course, everything was gobbled up on Monday. The follow-through on Tuesday and Wednesday was the more dramatic development that carried shares to a new 52-week high.
The sector is now up 10% from the pivot low and could certainly see some consolidation here. Regardless, XLE remains the leading sector and one that demands bulls’ attention.
The Trade: Buy the March $65/$70 bull call spread for around $2.20
Consider this a bet that XLE can rise above $70 by expiration. The trade risk is $2.20, and the reward is $2.80.
Devon Energy (DVN)
If the lower-octane path of buying XLE doesn’t speak to you, then the next two picks should. Devon Energy smashed the performance of its sector last year and has rebounded viciously from the recent selloff. Monday’s decline took prices below the 50-day moving average, but buyers swarmed in a big way.
The follow-through has carried DVN shares to a fresh high, and momentum traders are now taking over. The stock has a history of sharp ascents, so I’m willing to wager the current burst continues.
While you could sell puts or put spreads for a higher probability of profit, the history of big rallies suggests buying call spreads is a more effective way to play.
The Trade: Buy the March $55/$60 bull call spread for $1.50
You’re risking $1.50 to make $3.50 if DVN stock rises beyond $60 by expiration.
Energy Stocks to Buy: Occidental Petroleum (OXY)
Occidental Petroleum rounds out today’s trio of energy stocks. This week’s snapback has been even more exciting than DVN, and price now finds itself above rising 20-day, 50-day, and 200-day moving averages. The stock is up 21% from Monday’s low, so some backing-and-filling would hardly be surprising.
Still, it’s one of the best-looking breakouts in the sector and is worth consideration for a trade. Given its cheap price tag, I’m going to pitch a naked put play.
The Trade: Sell the March $30 put for 75 cents.
You’re obligating yourself to buy 100 shares at $29.25 if the put sits in the money at expiration.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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