Chart of the Day $XLE: Oil & Energy Stocks at an Inflection Point?

by Dan June 24, 2014 2:01 pm • Commentary

There are a couple large options trades in the oil patch that caught our eye. Both trades suggest that oil prices could be near an inflection point, possibly by September expiration.  What is interesting about the options activity is that one trade was purely directional, and specifically related to energy stocks, and the other agnostic to direction, but playing for a move one way or the other in the price of oil.  Let’s look at the two trades.

First is XLE. When the Energy Select etf was $100.35 a trader bought 50,000 of the Sept 98 puts, paying 1.94 to open. This trade breaks-even at $96.06 on Sept expiration (down about 4.25% from current levels.)   A look at the one year chart (below) shows the recent breakout in early June that saw the etf rally nearly 7% in a straight line over the next few weeks.  A logical pull back target would be $95 in the near term, a level that also corresponds with the etf’s rising 50 day moving average:

XLE 1yr chart from Bloomberg
XLE 1yr chart from Bloomberg

The one year chart of 30 day at the money Implied Vol (the price of options in blue below) and the 30 day Realized Vol (how much the stock is moving in White below) shows the cheapness of XLE options over the course of the past year, but also the building gap between how much the etf is moving (not at all, inching higher) vs the recent pick up in realized, likely a combination of the turmoil in Iraq and the upside call buying in many of the etf’s components likely tied to M&A speculation:

XLE 30 day atm IV (blue) vs 30 day Realized Vol (white) from Bloomberg
XLE 30 day atm IV (blue) vs 30 day Realized Vol (white) from Bloomberg

The second trade that stuck out to me was a buyer of 10,000 USO Sept 39 straddles, paying 2.50 to open for the Oil etf.  This trade breaks-even on Sept expiration if the etf is above $41.50 or below $36.50.

Both trades suggest that traders expect continued volatility in the energy sector and in oil the commodity. That’s in contrast to what we’ve seen across financial markets for the past 2 months.