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Blue-chip energy names like Exxon Mobil and Chevron have been in a sticky situation lately as WTI Crude oil prices have tumbled since trading nearly $95 in late September, recently tucking under $70 this week. Like the over exaggerated moves in the U.S. Treasury complex as of late, I believe that oil futures and energy stocks have also been oversold. In addition, I want to gain exposure to the energy sector that after a rough 2020, following rallies in both 2021 and 2022. The Energy Select Sector SPDR (XLE) is roughly down 5% in 2023 and seems to be approaching oversold conditions with an RSI (Relative Strength Index) level off 33 currently. Utilizing the XLE provides investors with diversification despite the fact that nearly 40% of the weightings are reserved for Exxon and Chevron. The other 60% of the ETF consists of another twenty or so names such as Marathon Petroleum Corp (MPC), Valero Energy Corp (VLO), and Warren Buffet’s favorite energy name in Occidental (OXY). The recent reprieve in interest rates coupled with a drop in the U.S. dollar is making some of the smartest investors scratch their heads on why the energy sector has taken such a dramatic nosedive since November 1. Even Goldman recently trotted out a bullish WTI trade looking to buy an upside call in the United States Oil ETF (USO) , looking for a more than 15% pop in oil prices by Spring. I do agree with my friends at Goldman that the price of oil is going to recover and move higher, however, I want to express my optimistic view differently. Instead of buying a call in an oil ETF like USO, I would prefer to sell a put in XLE which gives me direct exposure to energy companies names which of course have correlation to the price of crude oil. In addition, I can collect premium now for the willingness to own this ETF in the future. The trade: Selling a XLE, February regular expiration $82 for $2.85 The premium collected on each put sold is $285. Put options get their name because the buyer of the option has the right to “put shares back” to another trader, the person who sold the put. Put sellers have a bullish view on the underlying stock or ETF but, also want to generate income. It is important to remember that if the stock declines below the strike price before expiration, the option will be considered “in the money.” The seller will be put the stock and must buy it at the strike price. The net result is the strike price minus the premium collected for initially selling the put. I typically prefer to sell cash covered puts… simply meaning that I have the cash in my trading account in the event the one put I sold at $82 gets “put” to me in the terms of owning 100 shares of XLE at $82 a share. In this scenario, I would need $8,200 per one put option I sell. Lastly, in the event I do become the new owner of XLE at $82 upon expiration, I will look forward to a potential rebound in the price but, will also look to sell an upside call on that potential move higher. Staying nimble is the name of the game. DISCLOSURES: Sold XLE puts THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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