Energy is still a hot sector, China and India keep using more oil, yadda yadda. You probably know the fundamentals of this story by now as well as or better than we do. But this is a trade, not an investment.
The thesis: The energy sector is short-term very overbought. The RSI(2) reading on the energy ETF (XLE) is at 97.26; fast stochastic readings are well above and slow stochastic readings are almost at overbought levels, and the stock is pushing near its upper Bollinger band. The stock bounced off its 200MA on Friday and crossed above the 50MA on Tuesday, but may be pushing up into some significant resistance.
The trade: Energy stocks can stay very overbought for much longer (and can go much higher) than you’d expect. So while we always prefer long theta over short theta trades, that opinion holds especially in this case.
- If you refuse to sell spreads for whatever reason, you could buy some XLE March 75 puts around $2.65 (short theta). But again, if the stock pushes higher or just dips a tad and then resumes its uptrend, holding these puts might not be as much fun as…
- selling the XLE March 78/80 call vertical for $0.54 (long theta). There’s resistance at 78, and a move above 80 would mark new all time highs. Or, if you want some more time to let things really play out…
- You could buy the XLE March 78/April 80 call diagonal for about $0.30, and then roll your short 78 call forward once it loses about half of its value.
Disclaimer: as a bonus trade, we strongly urge you to run screaming from this and all other unofficial trades we publish; mismanagement of this energy trade could cause you to have to take delivery of 100,000 barrels of crude oil in Cushing, Oklahoma. Just kidding.
