Update – XLE Low Energy. Sad!

by CC September 21, 2017 2:45 pm • Trade Updates

In July we detailed a call calendar in the energy etf XLE. 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

In early September, with the etf essentially in the same place, the August calls expired and the trade a bit of a loser, we updated, with the idea that doing nothing wasn’t an option, so either take the loss or try to buy some time. Here was that update, from Sept 7th:

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

Buying time turned out to be the correct path as XLE has rallied a bit. With XLE now 66.90 this is worth about 1.00 and no longer a loser. However, it’s risk-reward profile at this point isn’t great. The trade is still out of the money, the etf is butting up against possible resistance, and it can only make 2.10 on a breakout.

However, a breakout could run a bit if the etf can get above 67.50 and the 71 calls are unlikely to harm the position too much so they could always be rolled higher to give the etf room on a breakout.

Therefore I think it makes sense to keep a tight leash on this one on the downside. If the etf fails here it probably makes sense to close the trade and be glad to be able to get it back to even with some trade management. On the upside, if it was able to break out you can let it run a bit, possibly rolling the entire trade up and out a bit if the trade becomes nicely profitable.