Dear Reader,

Yesterday, we looked at a Daily Price Chart of Fiserv, Inc., noting that FI stock is trading below the upper Keltner Channel in the ‘Buy Zone’.

For today’s Trade of the Day e-letter we will be looking at a monthly chart for the Energy Select Sector SPDR Fund ETF, symbol: XLE.

Before breaking down XLE’s monthly chart let’s first review the investment objective of the ETF.

The Energy Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Energy Select Sector Index.

Now, let’s begin to break down the monthly chart for the XLE ETF.

Below is a 10-Month Simple Moving Average chart for the XLE ETF.

Buy the XLE ETF

As the chart shows, in February, the XLE 1-Month Price, crossed above the 10-Month simple moving average (SMA).

This crossover indicated the buying pressure for XLE shares exceeded the selling pressure. For this kind of crossover to occur, an ETF has to be in a strong bullish uptrend.

Now, as you can see, the 1-Month Price is still above the 10-Month SMA. That means the bullish trend is still in play! 

As long as the 1-Month price remains above the 10-Month SMA, the ETF is more likely to keep trading at new highs and should be purchased.

Our initial price target for XLE is 101.50 per share.

97.7% Profit Potential for XLE Option

Now, since XLE’s 1-Month Price is trading above the 10-Month SMA this means the ETF’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an XLE call option purchase.

The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat XLE price to a 12.5% increase.

The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following XLE option example, we used the 1% Rule to select the XLE option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.

Trade with Higher Accuracy

When you use the 1% Rule to select an XLE in-the-money option strike price, XLE only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if XLE is flat at 97.49 at option expiration, it will only result in a 2.5% loss for the XLE option compared to a 100% loss for an at-the-money or out-of-the-money call option.

Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.

The goal of this example is to demonstrate the powerful profit potential available from trading options compared to ETFS.

The prices and returns represented below were calculated based on the current ETF and option pricing for XLE on 4/9/2024 before commissions.

When you purchase a call option, there is no limit on the profit potential of the call if the underlying ETF continues to move up in price.

For this specific call option, the calculator analysis below reveals if the XLE ETF increases 5.0% at option expiration to 102.36 (circled), the call option would make 47.6% before commission. 

If the XLE ETF increases 10.0% at option expiration to 107.24 (circled), the call option would make 97.7% before commission and outperform the ETF return nearly 10 to 1*. 

The leverage provided by call options allows you to maximize potential returns on bullish ETFs.

The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.

Interested in accessing the Optioneering Calculators? Join one of Chuck’s Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.

Short-Term Program from Chuck!

Chuck Hughes has just launched his exciting new trading service program, Lightning Trade Alerts. This new service focuses on low-cost & short-term options trade.

Members will receive hand-picked options trades from the 10-Time Trading Champion, Chuck Hughes.

Call our team at 1-866-661-5664 or 1-310-647-5664 to join or CLICK HERE to schedule a call! 

Wishing You the Best in Investing Success,

Chuck Hughes

Editor, Trade of the Day

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*Trading incurs risk and some people lose money trading.