Options Trade – Energy Select Sector SPDR's (XLE)
Monday, January 07, 2013

Where The Energy Is At!

**OPTION TRADE: Buy the XLE Mar 2013 70.000 call (XLE130316C00070000) at or under $4.75, good for the day. Place a protective stop limit at $2.00 and a pre-determined sell at $8.50.

by Ian Harvey

January 07, 2013

November 23, 2012


An ETF to watch will be the Energy Select Sector SPDR's (NYSE: XLE). The fund is one of the most popular ETFs on the market, with over $8 billion in assets; XLE has been offering exposure to the U.S. energy sector for more than a decade.

Top holdings include Chevron, Apache, and the highest ranked security, Exxon Mobil, which accounts for more than 19% of total assets. With such a significant weight in XLE, the earnings reports make this fund crucial to watch as it will likely move upwards in regard to positive earnings reports.

About XLE

The investment seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in The Energy Select Sector Index. The fund generally invests substantially all, but at least 95%, of its total assets in the securities comprising the index.

The index includes companies from the following industries: oil, gas & consumable fuels; and energy equipment & services. It may invest in cash and cash equivalents or money market instruments, such as repurchase agreements and money market funds. The fund is non-diversified.

Top Fund Holdings for XLE

Filing Date: 01/02/2013
Name Position Value % of Total
Exxon Mobil Corp 14,461,658 1,282,893,681 18.516%
Chevron Corp 9,398,099 1,037,456,149 14.974%
Schlumberger Ltd 6,514,249 465,117,379 6.713%
Occidental Petroleum Corp 3,320,097 259,498,782 3.745%
ConocoPhillips 4,215,342 249,590,400 3.602%
Anadarko Petroleum Corp 2,732,225 207,813,034 2.999%
EOG Resources Inc 1,553,346 192,117,833 2.773%
Halliburton Co 5,221,139 186,446,874 2.691%
National Oilwell Varco Inc 2,541,070 177,976,543 2.569%
Apache Corp 2,119,992 171,168,154 2.470%

The Technical Chart

The Energy Select Sector SPDR's (XLE) chart shows a six-month technical wedge pattern from $61 to $77 with higher lows and lower highs, and gives traders an initial bullish breakout target of $85.

The five-year chart of the energy ETF shows the same pattern with 2007 highs and a target of $90. Only a close below the $68 support level on a weekly basis would negate the bullish trend.

The Options Trade

The $85 target is more than 20% higher than current prices, and by buying a high-probability option that has enough time to be right is the solution here – therefore, there are two rules traders should follow:

Rule One: Choose an option with 70%-plus probability.

Delta is a measurement of how well an option follows the movement in the underlying security. It is important to buy options that pay off from a modest price move in the stock or ETF rather than those that only make money on the infrequent price explosion.

Any trade has a 50/50 chance of success. Buying in-the-money options increases that probability. Delta also approximates the odds that the option will be in the money at expiration. In-the-money options are more expensive, but they're worth it, as your chances of success are mathematically superior to buying cheap, out-of-the-money options.

For example, with XLE trading at about $73.79 at this time of writing, an in-the-money $70 strike call currently has $3.79 in real or intrinsic value. The remainder of any premium is the time value of the option.

Rule Two: Buy more time until expiration than you may need – in this case nearly three months -- for the trade to develop.

Time is an investor's greatest asset when you have completely limited the exposure risks. Traders often do not buy enough time for the trade to achieve profitable results. Nothing is more frustrating than being right about a move only after the option has expired.

Therefore, based on the facts above the following options trade is recommended…..

**OPTION TRADE: Buy the XLE Mar 2013 70.000 call (XLE130316C00070000) at or under $4.75, good for the day. Place a protective stop limit at $2.00 and a pre-determined sell at $8.50.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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