Amped for Energy

Hey Traders

The energy ETF XLE has been strong for over a month now, but especially so for the past 10 days.

The recent ramp-up has been helped by a big rotation out of tech that saw the QQQ drop 8% (at the low on Tuesday).

XLK, the tech ETF, closed down over 4% since Feb. 12, while XLE is up almost 9% in that time.

I have fundamental reasons to think the energy surge will continue:

  • The Biden administration is gearing up for regulatory action that is going to cause oil rise

  • More importantly, demand is clearly picking up. People are traveling more as the US gets vaccinated. For instance, I’m going to see my parents for the first time in six months sometime in April (now that they both have MRNA vaccine).

Even with XLE up 9% in 10 days and $19 since the beginning of November (over 65%), the option order flow is saying …


Two massive bullish trades in XLE point toward a lot of upside …

So let’s break these down.

Trade No. 1

On its surface the first trade looks like a call spread sale …

That would normally be bearish (meaning the trader wants the stock to drop).

But in this case it was actually a roll …

The customer was already long 46 calls for a healthy profit. He or she sold their long 46 calls and rolled them to the 50 calls.

In doing this, the trader collected 1.86 AND maintained upside exposure to XLE.

This is classic risk management on a winner that has the potential for continued bullish movement.

I did the EXACT same thing in MRO yesterday …

I was long the MRO March 9 call for .88, and I sold my position at 1.55, 1.85 and 2.11.

Translation: Increases of 40%,  40%, and 20%. … All told, a 101% gain.

I took a TINY bit of this profit and bought the March 5th 11 calls for .60.

The trader above was more aggressive than I was, because they used a healthy portion of their profits to buy the 50 calls.

This trader would NOT have done this trade if they didn’t think the stock was going to keep going.

Trade No. 2

The second trade is more cut and dry.

A trader bought the September 52-59 call spread on a small ratio, paying a little over 1.70 net.

The trader who put this on wouldn’t have done so unless they think the stock is going to make a run at $55 a share — because that’s where the spread really starts to see its profit ramp up.

You simply do not do this trade unless you have a strong bull case for the next six months or so.

This trader is looking for another 17% in XLE between now and September expiration.

The Takeaway

The two trades above, along with my fundamental case, have me LOVING energy.

I like conglomerates like XOM and CVX, and I like names like MRO and HES as well.

They will all do better with increasing demand for gas.

One name in particular that keeps showing up on my proprietary trading scanner is ET.

I will likely be buying calls this week …

Your Only Option,

Mark Sebastian

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.