A few weeks ago, when Crude Oil was in the low $40s we made the case that large cap oil stocks were showing great strength relative to the commodity, and the XLE, the Energy Select etf was poised to breakout to new highs on a rebound in crude. I detailed this view, and a defined risk trade idea on CNBC’s Options Action on Nov 11th:
XLE ($69.50) Buy the Jan 70/77 call spread for $2
- Buy 1 Jan 70 call for 2.25
- Sell 1 Jan 77 call at .25
Break-even on Jan expiration
Losses of up to 2 between 70 and 72 with max loss of 2 below 70
Gains of up to 5 between 72 and 77 with max gain at or above 77
Now with the XLE at $74.90, this call spread can be sold at $4.25 for a tad more than a double. I suspect it makes sense to get a bit closer to the short strike, but at that point it might make sense to take profits and roll a portion of the gains up and out as they say. I would add that with the strength in the U.S. dollar, we could see crude find some technical resistance at $50, which could be reason enough to consolidate some of the recent gains in the commodity, and in the related stocks.
An alternative idea for a roll of some of the XLE gains might be to look at one of the components, that has yet to breakout, like Schlumberger (SLB). Here’s what I mean…
The stock is up 5.3% today, which does not exactly scream buy!!! But given the improved sentiment in the sector on the heels of the OPEC production cut, a breakout of recent technical resistance at $85, and a run back to the 52 week highs at $95 might be in the cards:[caption id="attachment_68531" align="aligncenter" width="600"] SLB 2yr chart from Bloomberg[/caption]
The two year chart above clearly shows the $10 wide air-pocket to the upside, but it’s important to note that yesterday (at the intra-day lows), the stock was challenging the uptrend that has been in place since the January lows. A break below that on some sort of collapse of the OPEC deal is something worth protecting against. Short dated options prices are very near the 52 week lows (30 day at the money implied volatility at 21.6%, well below the 2016 average of 27%) making long premium directional strategies attractive for those looking to defined risk:[caption id="attachment_68532" align="aligncenter" width="600"] From Bloomberg[/caption]
So what’s the trade?
With crude oil up nearly 10%, and SLB up 5% it makes no sense to chase here, a better entry might be in the low $80s after a consolidation of recent gains. The stock is on our radar.