Trade Alert - (XLE) December 26, 2013
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Trade Alert - (XLE)
Buy the Energy Select Sector SPDR (XLE) January, 2014 $83-$86 call spread at $2.55 or best
Opening Trade
12-26-2013
expiration date: January 17, 2014
Portfolio weighting: 10%
Number of contracts = 39 contracts
2014 will be the year of the global synchronized economic recovery. There is no way this happens without a rise in the demand for energy in all its myriad forms. That includes oil, natural gas, its distillates, coal, uranium, and alternatives like solar and wind. This is great news for all of the shares in the energy space.
There is one major downside risk. A deal with Iran on their nuclear program would be hugely negative, possibly taking as much as $30 out of the price of crude. That would involve the backing out of a Middle Eastern risk premium for the market, which has been there for most of the last 40 years. Peace is terrible news for the energy industry, especially for the majors.
However, I have been involved in many of these diplomatic efforts over the decades. They take years to unfold, not weeks. The clock in this world moves at an infinitesimal pace, unlike the fast-forward one in out own frenetic trading world. At the very least, we are safe until the January 17, 2014 expiration of the Energy Select Sector SPDR (XLE) January, 2014 $82-$85 call spread.
On top of all this, we are entering the lowest volatility time of the year. This call spread is also a de facto short volatility play. If the shares don?t move at all, you still get to keep the entire theoretical profit. And we are doing this right in front of the today wave of new cash that I expect to hit the market in the new year.
Non options players can buy the (XLE) outright at half the size.
Please note that a basket of stocks is going to deliver half the volatility of single stocks. Therefore, we have to be more aggressive with the positioning to make any money, picking strikes that are closer to the money.
For a list of the largest components of the (XLE) ETF, please click here at
http://www.sectorspdr.com/sectorspdr/sector/xle/holdings. You will find that the three largest holdings are ExxonMobile (XOM), Chevron (CVX), and Schlumberger (SLB).
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don?t execute the legs individually or you will end up losing much of your profit.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months farther out.
Here are the specific trades you need to execute this position:
Buy 39 January, 2014 (XLE) $83 calls at????...?$4.65
Sell short 39 January, 2014 (XLE) $86 calls at..??.$2.10
Net Cost:?????????????????.................$2.55
Profit at expiration: $3.00 - $2.55 = $0.45
(39 X 100 X $0.45) = $1,755 or 1.76% profit for the notional $100,000 portfolio.
