XLE – Crude Set Up

by Dan September 8, 2017 1:05 pm • Trade Ideas

Yesterday (read here) we updated a bullish trade idea in the S&P Energy Select etf, the XLE as it approached the downtrend that has been in place from its post election 52-week highs:

XLE 1yr chart from Bloomberg

For those technicians out there, who like to connect the dots, that early August high, coupled with today’s failure leads this chart(our)ist to consider a short entry.  What would be my downside target you ask? Well that’s easy… the convergence of the 2015 low / early 2016 breakdown level and the downtrend from the late 2016 highs near $60:

XLE 5yr chart from Bloomberg

Some of you might recognize the “triangle of death” formation.

Short dated options prices are cheap as chips with 30 day at the money implied volatility at 14%, a tick above the 52 week lows making long premium directional trades look attractive:

Trade Idea: Buy XLE ($64.50) Oct 64 / 60 Put Spread for $1

-Buy 1 Oct 64 puts for 1.40

-Sell 1 Oct 60 puts at 40 cents

Break-even on Oct expiration:

Profits: up to 3 between 63 and 60 with max gain of 3 at 60 or lower

Losses: up to 1 between 63 and 64 with max loss of 1 at 64 or higher

Rationale: risking 1 to possibly make up to 3 if the XLE were to retest technical support near $60 down about 7% in the next six weeks after it has rallied about 5% since making new 52 week lows late last month.