Energy due for a bounce? Trading for a comeback in the sector using options
Equity bulls continue to run as the fourth quarter kicked off and another new all-time high was printed this morning in the S & P 500 , led by the artificial intelligence theme. With a continued noisy backdrop in the stock market and the government now on its third day of another shutdown, I want to look where nobody else is looking. This options trade will focus on the current dispersion amongst the S & P 500’s 11 sectors. I believe energy is trading at a discount and I want to use options on XLE to capture this lagging 2025 sector. Energy has had a tremendous five-year run, but investors have been cautious in 2025 as uncertainty swirls around policymakers. The new administration has been clear with their mantra of “Drill baby, Drill”, yet the leading names in energy have been mixed and sector as a whole has been a bigtime laggard on a yearly perspective. Traders have not expressed any concern about the current shutdown as the VIX stays tethered to 16 and equity markets continue to melt higher. In addition, the government shutdown may further solidify the Fed’s appetite to cut interest rates as the administration has stated that they will utilize this shutdown to further reduce government jobs, think “DOGE 2.0.” It is important to remember that the widely used energy ETF (XLE) has a heavy weighting to just three leaders in the sector: Exxon (XOM) , Chevron (CVX) , and ConocoPhillips (COP) . These three names make up nearly 50% of the exposure in XLE. I am comfortable with this extreme overweighting as Exxon is a fan favorite in energy and also is a holding in my Essential 40 ETF (ESN) and I believe that all three of these energy names are indispensable to the U.S. economy. I want to use a risk reversal to either be put to additional energy exposure or to find a no-cost way to capture upside in the third worst sector in 2025. The trade Sold the Nov. 21 $89 XLE put for $2.55 Bought the Nov. 21 $90 call for $2.50 This spread was put on for a very slight credit of $0.05 or $5. XLE was trading around $89 when this spread was executed. An investor must be prepared to own XLE at $88.95 in the event the puts get assigned at expiration. DISCLOSURES: Kilburg is short puts and long calls in XLE, expiring Nov 21 All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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