- ETFs that try to capture crude oil futures are getting destroyed, (USO, OIL etc.)
- Crude oil futures crashed this week, but oil & gas firms not going down with it.
- Energy ETFs may not be as exciting as USO but have exposure to both crude and natgas which has been rising.
- A look at what Bulls and Bears are pricing in XLE and ways to trade that can in the more "boring" ETF without the decay of futures rolling or long calls.
On Monday we took a look at the USO etf and discussed the difficulties of trying to trade from the bullish side in those very flawed instruments. Is it possible that people are getting wise and instead focusing on the oil & gas firms ETFs? XLE - Energy Select Sector SPDR, and XOP - Oil & Gas Explore & Producers have held up quite well during the onslaught on crude prices.
The Set Up
XLE was $60 to start the year, fell below $25 and has rebounded slightly to $33.50. XOP began the year near $100, fell to $30 and has rebounded to $45. Amidst all the chaos in crude oil futures, both are actually higher on the week. How are options traders pricing the next two months? Let's focus on XLE:
From OptionsAI technology, 2 month expected move for XLE:
Ways to Play
Volatility across the market is still historically high, even with the sharp drop since the broader market lows. But specifically to the oil & gas space we've seen historic volatility in crude oil futures this week but the firms involved in the space have largely shrugged it off. How can one incorporate that into a bullish, or even "not bearish" trading view?
First example, being bullish, by "selling to the bears".
Using OptionsAI technology we can target a move higher, within the expected move and see various trades, from calls to spreads. If one wants to be bullish, but not dependent on a sharp move higher, a short put spread:
In this case the risk reward is about 3/2 with a breakeven on the trade about a dollar below where the stock is trading:
The second way to be "bullish by not being bearish" is by selling the move entirely.
Here, using OptionsAI technology one can create a short iron condor with a neutral target:
In this case the risk reward is closer to 1/1 and it establishes a large area of profitability (the inside white). It's essentially a bet that the ETF does not move outside its expected move bands. If the ETF were to go higher it is likely volatility would fall, so it's also a bullish bet vs implied vol. The strikes can be adjusted to lean bullish as well, centering the trade higher.
Give OptionsAI technology a try with your own price target in AAPL HERE