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Energy Select Sector SPDR (ETF): Get Paid to Gas Up on XLE

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Oil prices started on the wrong foot this year, with The Energy Select Sector SPDR Fund ( XLE ) falling below $50 per share. Since then, it has recovered 30% from those lows.

Click to Enlarge Fundamentally, I don't believe that we ever had a change in demand to warrant such a fall. Simply put, the world experienced fast inflation in new supply that created an oil glut.

Consequently, OPEC is actively pursuing strategies to pump up oil prices while protecting its market share dominance.

Technically, the recent price action could be signaling more potential in crude, so setting up an XLE pair trade could capture this upside. Since equity markets are trading along with oil prices, this setup would fit nicely in a short-biased portfolio.

The sharp drop in oil prices stripped XLE components to their bare bones. What's left has much more favorable intrinsic value, so revisiting or breaking recent lows will take some serious deterioration in stocks. At this point, such a threat looks unlikely.

Trade #1: Buy the May XLE $67 call. The amount you pay, $1.43 per contract, is also the max potential loss. This trade profits with any rise in the XLE from current levels in the next 30 days.

But since I mentioned that it's likely that we won't revisit the lows of 2016, you can add a second trade to lower your entry cost.

Trade #2: Sell the Dec $55 put. This is also a bullish position for which you collect $1.55 per contract. For this trade to be successful, XLE cannot fall below $55 per share in 2016. By selling the put, you're committed to buying XLE if its price falls below the strike. So, only sell the put if you're willing and able to buy XLE at $55 per share this year.

The net effect of both trades leaves you with a net credit. So you're getting paid for the chance to profit from an oil rally. There is enough time on these trades for you to adjust either or both as energy prices move. You don't have to be committed to holding either trade until expiration.

Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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