Option Trade of the Week
SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP) Calls
Monday, May 04, 2015

**OPTION TRADE OF THE WEEK: Buy the XOP Sep 2015 55.000 call (XOP150918C00055000) at or under $3.80, good for the day. Place a protective stop limit at $1.50 and a pre-determined sell at $7.20.

by Ian Harvey

Monday, May 04, 2015

Introduction

**Crude Oil’s Positive Trend Sets The Play In Motion For XOP!**

The option trade of the week is based on the fact that oil prices are on the increase, as discussed in the article “Oil Price Continues To Rise!” - since one of the most surprising performances, for last week, came from the energy sector.

The high degree of bearish sentiment created the perfect environment for a rally and crude oil started the 2nd quarter with a positive trend. It still looks strong technically as it has overcome major resistance and the money flow is positive for the first time since last August.

Following on from this scenario, seasonal analysis comes into play, as long as there is a trigger to act on the technical studies emphasized on the seasonal tendencies.

One way of playing this situation positively is to look for one of these seasonal movements within the stock market – which brings us to SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP), one of the most diversified ETF's in the energy exploration and production sector today, as it typically peaks in June and then bottoms in December.

Crude oil has a strong tendency to bottom in February. The current technical outlook on both crude and the XOP indicates they can move higher during May. This will mean that both may make new rally highs by the middle of the month.

Technical Outlook

SPDR S&P Oil & Gas Explore & Production has a 52-week low of $41.63 and a 52-week high of $84.04. The stock’s 50-day moving average is $50.00 and its 200-day moving average is $51.00.

A Look at the XOP

This ETF has roughly $1B in assets, even after the recent decline. This fund's goal is to correspond generally to the total return performance of the S&P Oil & Gas Exploration & Production Select Industry Index. The S&P Oil & Gas Exploration & Production Select Industry Index represents the oil and gas exploration and production sub-industry portion of the S&P Total Markets Index. This fund has a manageable gross expense ratio of 0.35%.

More importantly, XOP has relatively level exposure to 88 different energy companies with weightings ranging up to 1.87% down to 0.57%. The fund is more geared towards upstream exploration and production, and this segment could also be the most worthy to see a rebound if oil prices recover. About 75% of the fund is allocated here, while 20% is allocated to refining and marketing companies, and another 6% is in companies that are deemed integrated, or probably both of the above.

Money Inflow

Looking at week-over-week shares outstanding changes among ETFs, one standout is the SPDR S&P Oil & Gas Exploration & Production ETF where an approximate $267.0 million dollar inflow -- that's a 16.9% increase week over week in outstanding units (from 28,700,000 to 33,550,000) – has occurred.

Among the largest underlying components of XOP, in trading was Clean Energy Fuels Corp (Symbol: CLNE) -- off about 0.1%, EP Energy Corp. (Symbol: EPE) -- up about 0.1%, and Range Resources Corp (Symbol: RRC) -- lower by about 0.3%.

Conclusion

Clearly, XOP is less risky than buying just several names in energy, since company specific black swan events like insufficient hedging, production issues, or continued lower commodity pricing are true threats to a portfolio. By taking this option trade of the week in XOP instead and thus 88 different stocks, an investor is much more diversified and therefore safer. In addition to the diversification advantage, the fund has experienced significant declines, but timing seems right to initiate the beginning of a position. Compared to other ETF's with 100% energy exposure like IEO or PXE for example, XOP was vastly superior by most basic metrics including NAV and liquidity, expense ratio, and most important of all diversification.

Therefore, based on the facts above the following option trade of the week is recommended…..


**OPTION TRADE OF THE WEEK: Buy the XOP Sep 2015 55.000 call (XOP150918C00055000) at or under $3.80, good for the day. Place a protective stop limit at $1.50 and a pre-determined sell at $7.20.

Please Note: This is a recommendation, but it is up to the individual trader to consider when to enter the trade, adjust the stop-loss and pre-determined sell positions, according to his/her risk tolerance!



”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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