SPDR S&P Oil & Gas Exploration & Production ETF (XOP) Trade Alert
Action to Take:
Sell to Open the XOP March 17, 2017 $42 call
Buy to Open the XOP March 17, 2017 $47 call
For a net credit of $0.65 or more
Max capital at risk per spread: $500 – $65 = $435
Return on capital at risk: $65/($500 – $65) = 14.9%
Days to expiration: 39
Since April of last year, West Texas Intermediate light crude oil has been trading within a clear channel with a slight uptrend. Since late December, the U.S. dollar has taken a break from its uptrend and has dropped about 3.7%.
In light of a weakening dollar, it would be normal to see a pickup in crude oil. Assets priced in U.S. dollars tend to drop in value as the dollar strengthens and increase in value as the dollar drops. But as you can see at the top of the chart below, the relative strength of light crude oil has been declining since January. Light crude oil has struggled to break out above $54 per barrel.
I believe that the dollar will resume its upward climb in the coming weeks given the clear intention by the Federal Reserve to raise the federal funds rate. That, combined with a strong supply of crude, should result in light crude oil trading back down toward the bottom of its channel.
This presents us with an opportunity to put on a bear call spread on the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). XOP is made up of exploration and production companies such as Anadarko, Occidental Petroleum, and Concho Resources. These companies tend to see a decrease in earnings as crude oil decreases in price.
And unlike light crude oil, which has been mostly flat though December and January, XOP has been in a clear downward trend. You can see this by the declining orange channel lines in the chart below. In fact, XOP recently broke below its 50-day moving average (as shown by the circle).
We are able to put on a bear call spread on XOP with a short option strike of $42, which is above the 50-day moving average, as well as above the downtrending channel.
And we can collect enough premium to generate a 14.9% return in just 39 days to expiration on this high-probability trade.
Editor, Four Point Trader