Update – XLE: Low Energy, Sad!

by CC September 7, 2017 12:46 pm • Trade Updates

In July we wrote about the energy sector, focusing particularly on its relationship to the dollar. We also detailed a call calendar in the Energy etf XLE as it neared the upper band of its well-defined downtrend. The idea behind the calendar was that selling near term near Resistance could finance an eventual breakout above that resistance. Here was the trade idea, from July 18th:

XLE ($64.90) Buy the Aug/ Dec 68 call calendar for 1.15
  • Sell 1 Aug 68 call at 17 cents
  • Buy 1 Dec 68 call for 1.32

August expired worthless and now the position is simply the Dec 68 calls. The recent weakness in the dollar hasn’t helped. And unfortunately, with the etf essentially in the same place from entry, those Dec calls have declined in value due to time decay. With the stock 65 those calls are worth just .75, vs the 1.15 cost basis. Managing a losing trade that still has plenty of time is one of the more difficult aspects of options trading. IT is often more art than science. But one rule of thumb is to not just sit there and do nothing, particularly when the position is long premium, and out of the money. Therefore there are two ways of moving on this trade. One is to simply close the trade for a loss, and look for a a better entry, and better strike setup. The other is to at least reduce some of the further risk of the trade, while sticking around in an etf that in recent weeks has shown some signs of life. With this trade still looking out to December I think it makes sense to at least give the trade a chance over the next month by turning the Dec calls into a vertical:

Action: vs 1 Dec 68 call, sell to open 1 Dec 71 call at .25

Rationale – This takes off some of the premium at risk into December. It caps gains fairly aggressively, but given that the Dec 68 call is still out of the money, doing nothing isn’t really an option.

New Position: XLE ($65) Long Dec 68 / 71 call spread for 90 cents

Break-even on Dec expiration:

Profits of up to 2.10 between 68.90 and 71, max gain at 71 or higher.

Losses of up to 90 cents between 68 and 68.90 with max loss of 90 cents below 68