Energy Sector Poised for Potential Rebound: An Options Strategy for 2025
Despite a strong start to the fourth quarter for the broader market,with the S&P 500 reaching a new all-time high fueled by artificial intelligence stocks,the energy sector has lagged behind.This presents a potential opportunity for investors, according to a recent analysis focusing on sector dispersion within the S&P 500.
While the energy sector has experienced significant gains over the past five years, investor caution has prevailed in 2025 due to policy uncertainty.Despite the new administration’s stated policy of increased domestic drilling – “Drill baby, Drill” – performance among leading energy companies has been mixed, resulting in underperformance for the sector overall.
Interestingly, market volatility, as measured by the VIX, remains subdued at 16, and equity markets continue to rise even amidst a government shutdown. The shutdown itself may even increase the likelihood of Federal Reserve interest rate cuts, as the administration intends to use the situation to reduce government employment.
The Energy Select Sector SPDR Fund (XLE) is heavily concentrated in its top holdings, with ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP) comprising nearly 50% of the ETF’s exposure. This concentration is viewed favorably by some analysts, notably given the importance of ExxonMobil – also a component of the Essential 40 ETF (ESN) – and the broader importance of these three companies to the U.S. economy.
To capitalize on a potential energy sector rebound, a risk reversal strategy was recently implemented. Specifically, the November 21st $89 XLE put option was sold for $2.55, and the November 21st $90 call option was purchased for $2.50. This trade resulted in a slight credit of $0.05, or $5 total.At the time of execution,XLE was trading around $89.
Investors deploying this strategy should be prepared to potentially acquire XLE shares at $88.95 should the put option be assigned at expiration.
Disclaimer: The author is short puts and long calls in XLE, expiring Nov 21. All opinions expressed are solely those of the contributor and do not reflect the views of CNBC, NBC UNIVERSAL, or their affiliates. This content is for informational purposes only and does not constitute financial, investment, tax, or legal advice.
