Using Options To Ride A Rebound In XLE

December 11, 2014

If oil prices bounce and take the oil ETF ‘XLE’ with them, playing that jump might make more sense with options.

This is a weekly column focusing on ETF options by Scott Nations, a proprietary trader and financial engineer with about 20 years of experience in options. More than 94 million options on ETFs were traded in November, and because ETFs and options are among the fastest-growing financial vehicles in the world, it only makes sense to combine the two. This column highlights unusually large or interesting ETF options trades to help readers understand where traders believe a particular ETF may be headed. In doing so, Nations will examine the underlying options strategy.

Gasoline is now selling for less than $3 a gallon all over the U.S., and for less than $2 a gallon in certain oil-rich states, including Oklahoma. We can thank drastically lower crude oil prices that have dropped by almost a third this year.

But big oil companies aren’t thankful. As crude oil drops in price, the value of their reserves drops too, and that drags down their stock prices. Since the start of 2014, the Energy Select Sector SPDR Fund (XLE | A-95) has dropped by 10.7 percent, as you can see in the chart below:

XLE_YTD_Returns

XLE is made up of more than 40 integrated oil companies (such as Exxon Mobil and Chevron); oilfield service providers (such as Schlumberger and Halliburton); energy transportation providers (such as Kinder Morgan); and independent refiners and marketers (such as Tesoro and Valero).

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