The Best Way To Trade The Energy Sector
Crude oil has crashed and it’s taken the entire energy sector with it. The price of a barrel of crude has gone from $105 to $55 in about six months, a 48% decline. That’s officially a crash.
Meanwhile, the energy sector has dropped roughly 20% overall during that period. However, the collateral damage has been far-ranging. Just about any company associated with energy has taken one (or two) on the chin.
So what’s the deal?
Basically, while energy stocks should be lower due the plunging price of oil, some companies should get hit more than others. Of course, that provides trading opportunities for savvy traders… especially options traders.
You see, some energy companies should definitely be selling off right now. Any company with a high cost of production is certainly not going to fare well in a low price environment. Shale oil companies, deep sea drillers, etc., those are the stocks to avoid.
However, some companies will be just fine.
Major conglomerates have multiple sources of revenue, for instance. Refiners will need to keep refining roughly the same amount of oil regardless of cost. Renewable energy will still need to be developed.
You get the picture. There are plenty of stocks which have significant bounce-back potential.
So how does an option trader handle this scenario?
I believe this is a perfect put selling opportunity. Pick a stock (or stocks) you wouldn’t mind owning and sell puts at or below the current price. Volatility has been bid up due to the selloff. That means you can make good money on the puts themselves, and have the potential to own a cheap stock at your price point.
It’s about as close to a win-win situation as there is in investments. Just make sure you’re picking a company you’re comfortable owning for the long-term. A good choice is the type of stock which has a safe dividend.
For example, Exxon Mobil (XOM) is a company whose dividend is completely safe. XOM’s share buyback program is also a good one. Selling puts or puts spreads on XOM is a great way to add income to your portfolio while giving yourself a solid entry point for the stock.
Yours in Profit,
Gordon Lewis
Category: Breaking News
