Big Printin’ – $XLE: Running on Empty

by Dan December 2, 2015 12:02 pm • Commentary

In front of Friday’s OPEC meeting, S&P Energy Select etf (XLE) puts are active, with 83,000 puts already trading on the day, vs the one month average of 61k per day and 27k calls traded today.  There are a couple decent size trades in XLE Dec puts that caught my eye this morning, with the most active strike the Dec 65 puts, with 51,000 having traded so far.

First, when the etf was $67.85 there was an opening buyer of 20,000 of the Dec 65 puts for .79, and then a bit later when the stock was $67.68 there was an opening buyer of 11,500 of the Dec 65 puts for 86 cents.    The average price for this strike is about 80 cents, which makes a break-even down at $64.20 on Dec expiration in 16 days, or down about 5.25% from current levels.

Taking a quick look at the year to date chart of XLE, $65 is important near term support. And if it breaks, it has little support down to $60. That’s essentially the double bottom low from August and September:

XLE ytd chart from Bloomberg
XLE ytd chart from Bloomberg

Taking a slightly longer term view, from oil’s most recent top in 2014, the XLE has not been able to make a meaningful break above the downtrend (that has been in place since June 2014). The downtrend line has been the spot for short entries or take off long exposure in oil stocks:

XLE 2yr chart from Bloomberg
XLE 2yr chart from Bloomberg

It’s not just the OPEC meeting that traders are positioning in front of, with the ECB meeting tomorrow and most expecting further European QE, and the Dec 16th FOMC meeting where the market expects the Fed’s first rate increase since 2006, is all putting upward pressure on the dollar, and the obvious inverse relation to commodities like oil which settle in dollars.  But if you think consensus is going to continue to nail this short term trade, you may want to consider The Dude’s eternal wisdom:

This is a very complicated case….You know, a lotta ins, a lotta outs, a lotta what-have-yous