Commodities are making a comeback, and the inflation trade is returning. We’ve come a long way from the days of negative oil prices as traders have returned slowly but surely to energy stocks in search of bargains. Black gold just eclipsed $50 for the first time since last February, and the trend is pointing to higher prices.
At the same time, small-caps are suddenly en vogue. The reign of large-cap tech is over, or at least put on hold, as investor affection finally turns toward areas that underperformed for much of 2020. The twin forces of oil’s recovery and a small-cap resurrection provide a tailwind for all things energy.
Today I’m sharing my three favorite ways to capitalize — one exchange-traded fund and two stocks.
After a brief survey of their charts, I’ll reveal my preferred options trade.
Energy Stocks to Buy as Oil Heats Up: Oil & Gas ETF (XOP)
Wall Street offers a suite of energy stock ETFs, but my favorite for building cash flow trades is XOP. Unlike the Energy Sector ETF (NYSEARCA:XLE), XOP isn’t dominated by one or two large-caps. Instead, it offers more diverse exposure. The higher volatility translates into really juicy premiums for strategies like covered calls and naked puts.
From a charting perspective, its recovery is well underway. The past three days have seen a sharp 10% increase pull prices well above the 20-day moving average. Volume exploded to confirm the rally’s strength and suggest the trend is here to stay. While I’d normally advise waiting for a pullback, I don’t mind starting a partial position here if the momentum continues.
The Trade: Sell the Feb $56 puts for 85 cents.
Devon Energy (DVN)
The price chart of Devon Energy stood out to me as I scanned the sector. While XOP hasn’t yet cleared its June high, DVN has. This week’s breakout clears the way for what should be a continued climb back toward $22.50 and beyond. The 20-day and 50-day moving averages are climbing in support of the recent uptrend, and we now have multiple floors in place to support DVN during pullbacks.
With the stock up substantially over the past three days, we can make a case for a pause or retracement over the coming sessions. It’ll be a gift to be bought if we get one, though. I suggest only entering a partial position now to open the door to adding more later into weakness.
Devon’s low price tag works to the advantage of a naked put.
The Trade: Sell the Feb $15 put for around 36 cents.
Exxon Mobil (XOM)
Exxon Mobil rounds out our trio of energy stocks. Despite suffering a third consecutive quarterly loss, a massive debt burden, and legions of investors losing faith, the company’s shares have still cobbled together a respectable rebound. Since the late-October low, XOM is up nearly 50%.
Skeptics will argue the stock has lagged many of its peers. I can’t dispute the argument — it has. But, if the sector remains in favor with the Street, then you better believe XOM is going to get pulled higher. And, if we’re lucky, it will play catch-up to some of the better performers. Toss in a 7.7% dividend yield that the company appears willing to defend at all costs, and I think you’ve got a decent case for bullish trades.
To elevate our odds, I’m once again going with a short put play. This sets us up to profit even if XOM trades sideways for a spell.
The Trade: Sell the Feb $40 put for 70 cents.
On the date of publication, Tyler Craig held LONG positions in XOP.
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