Oil Spill? XLE

by Dan June 23, 2020 2:59 pm • Trade Ideas

Earlier today my friend Carter Braxton Worth from Cornerstone Macro research tweeted the following about Crude Oil’s recent price action:

From a technical perspective, Carter thinks oil is a short here… I would take it a step further and look at oil stocks as a way to express a bearish view via the S&P Energy Select etf, the XLE, where Chevron (CVX) and Exxon (XOM) make up 45% of the weight.

The chart of the XLE has some fairly instructive lines, last month rejected after a 100% rally from its March lows at its 150-day moving average (yellow line, using 150 as that is Carter’s fav long term avg) and has mild support at its 50-day moving average (purple line), but below the uptrend from the March lows. The chart looks heavy.

 

So what’s the trade? If I were inclined to play for a move back to the mid-30s in the next month I would consider buying a near the money July put and look to spread by selling a lower strike put of the same expiration on the first leg lower, reducing the premium at risk.

WIth the etf at $39.50, the July 31st 39 put is offered at $2, or 5% of the etf price, if I were to buy that playing for a move lower, my break-even is down at $37, 6.3% lower.