Strategies for a Resurgence: Navigating the Revival of Energy Stocks with Earned Returns

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Investing / Saturday, 09 December 2023 19:48

"Strategic Moves: Leveraging Oversold Energy Stocks for Potential Gains"

In the current tumultuous energy market, blue-chip giants like Exxon Mobil and Chevron find themselves navigating choppy waters, with WTI Crude oil prices experiencing a significant dip since late September. The recent tumble, with oil prices slipping below $70, echoes exaggerated movements akin to the recent fluctuations in the U.S. Treasury complex. However, amid the bearish sentiment, there's a compelling case for a potential comeback.

The Energy Select Sector SPDR (XLE), a diversified ETF encompassing key energy players, has seen a modest 5% decline in 2023. Yet, with an RSI (Relative Strength Index) level around 33, it appears to be approaching oversold conditions, presenting an intriguing opportunity for astute investors. Despite the significant weightings allocated to Exxon and Chevron, approximately 40%, the remaining 60% comprises a mix of around twenty other names, including Marathon Petroleum Corp (MPC), Valero Energy Corp (VLO), and the notable Occidental (OXY), endorsed by none other than Warren Buffet.

The recent divergence in interest rates and a weakening U.S. dollar has left many scratching their heads over the precipitous decline in the energy sector since November 1. Even financial behemoth Goldman Sachs has presented a bullish outlook, advocating for an upside call in the United States Oil ETF (USO) with a projected 15% surge in oil prices by Spring.

However, our approach deviates. Rather than purchasing a call in an oil ETF like USO, the strategy involves selling a put in XLE, providing direct exposure to energy companies linked to crude oil prices. This not only aligns with the optimism for an oil price recovery but also allows for the collection of premium, reflecting a willingness to own XLE in the future.

The trade at hand involves selling a February regular expiration $82 put for $2.85, resulting in a premium collection of $285. This approach, known as selling cash-covered puts, entails having the cash in the trading account equivalent to the number of puts sold. In the event the put is exercised, requiring ownership of 100 shares of XLE at $82 each, the strategy becomes an opportunity to potentially profit from a rebound while also exploring the option to sell an upside call on any upward move.

In a market defined by volatility, nimbleness is key. The strategic combination of optimism, premium collection, and flexibility positions investors to navigate the unpredictable currents of the energy sector.

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"Strategizing for Success: Navigating the Energy Market's Ebb and Flow"

As the energy market experiences a rollercoaster ride, strategic investors are eyeing opportunities amidst the turbulence. The recent downturn in blue-chip energy names, including Exxon Mobil and Chevron, fueled by a dip in WTI Crude oil prices, has sparked interest in potential comebacks. In parallel with the erratic movements in the U.S. Treasury complex, there's a belief that both oil futures and energy stocks have been oversold.

The Energy Select Sector SPDR (XLE), despite a modest 5% decline in 2023, is showing signs of approaching oversold conditions, as indicated by its RSI level of around 33. This presents a compelling entry point for investors seeking exposure to the energy sector, particularly after the tumultuous year that was 2020, followed by rallies in 2021 and 2022.

The strategy of selling cash-covered puts in XLE, with a specific focus on the February regular expiration $82 put for a premium of $2.85, exemplifies a nuanced approach. This not only aligns with the anticipation of an oil price recovery but also allows investors to collect premiums while expressing a willingness to own XLE in the future. The flexibility of this strategy, coupled with the potential for profit in a rebound scenario, underscores a dynamic approach to navigating the uncertainties of the energy market.

In conclusion, as global economic factors continue to influence energy prices and geopolitical dynamics, investors who stay nimble and capitalize on calculated strategies are positioned to weather the market's ebb and flow. The intricacies of selling cash-covered puts in XLE, combined with a forward-looking perspective, exemplify a tactical approach to harnessing potential gains while mitigating risks in the ever-evolving energy landscape.