Energy Sector Poised for Potential Rebound: An Options Strategy forโ 2025
Despite a โstrong start to the fourth โquarterโค for the broaderโฃ market,with โthe S&P 500 reaching aโ new all-time highโ fueled by artificial intelligence stocks,the energy sector has lagged behind.This presents a potential opportunity for investors, according toโข a recent โขanalysis focusing on sector dispersion within โthe S&P 500.
Whileโข the energy sector has โexperienced significant gains over the pastโ five years, investor caution has prevailed โin 2025 due โto policy โฃuncertainty.Despite the new administration’s stated policy โof increased domestic drillingโ – “Drill baby, Drill” – performance among leading energyโ companies has beenโ mixed, resulting in underperformance for the sector overall.
Interestingly, โคmarket โvolatility, as measured by the VIX,โ remains subdued at 16, and equity markets continue to rise even โฃamidst a government shutdown. โฃThe shutdown itself may even increase the โขlikelihood of Federal Reserve interest rate โcuts,โค as the administration intends to use theโข situation to reduce government employment.
The Energy Select Sector SPDRโค Fund (XLE) is heavilyโ concentratedโฃ in its top โholdings, with ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP) comprising nearly 50% ofโ 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 โETFโ (ESN) – andโ the broader importance of these three companies to the U.S. economy.
To capitalize on a potential energyโ sector rebound, a โrisk 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 aโ slight credit of $0.05, or $5 total.At the time of execution,XLE was trading around $89. โ
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 authorโ is short puts and long calls inโฃ XLE, expiring โฃNov โ21. All opinions expressed are solely those of the contributor andโค do not reflect the views of CNBC, NBC UNIVERSAL, โขor their affiliates. This content is for informational purposes โonly and does not constituteโค financial, investment, tax, orโฃ legal advice.