Oil & Gas ETF Offers Trade Opportunity

Dear Reader,

Yesterday, we looked at a Daily Price Chart of TransDigm Group Inc., noting that TDG’s 50-Day EMA is trading above the 100-Day EMA signaling a ‘Buy’.

For today’s Trade of the Day we will be looking at a Keltner Channel chart for the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). The SPDR SP Oil and Gas Exploration and Production ETF seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the SP Oil and Gas Exploration and Production Select Industry Index.

Now, let’s begin to break down the Keltner Channel chart for XOP. Below is a Daily Price Chart and the three Keltner Channels for the XOP ETF.

Buy the XOP ETF

The Hughes Optioneering Team uses the Keltner Channels as an indicator to determine whether an ETF is overbought or oversold. If an ETF’s daily share price is trading above the upper Keltner Channel, this signals that the ETF is temporarily overbought and subject to a retracement.

Even ETFs that are in the strongest bull trends do not advance in a straight line. There are always price retracements along the way. When an ETF becomes overbought, it’s price will typically decline soon after as the inevitable profit taking occurs.

The XOP daily price chart shows that the ETF is in a strong price uptrend and has become overbought several times. You can see this as XOP has traded above the Upper Keltner Channel on multiple occasions recently.

But, in every scenario when XOP became overbought, the ETF soon experienced a pullback.

Finding opportunities when an ETF experiences a pullback is why the Hughes Optioneering Team uses the Keltner Channels. They help us find a lower-risk entry point.

The Keltner Channel “Buy Zone” occurs when an ETF is trading below the upper Keltner Channel. Once the daily price is trading below the upper channel, it provides a lower-risk buying opportunity as the ETF is likely to rally.

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Profit if XOP is Up, Down or Flat

Now, since XOP shares have retraced into the Keltner Channel ‘Buy Zone’, this offers us a prime trade entry opportunity. Let’s use the Hughes Optioneering calculator to look at the potential returns for an XOP call option spread.

For this option spread, the calculator analysis below reveals the cost of the spread is $333 (circled). The maximum risk for an option spread is the cost of the spread.

The analysis reveals that if the XOP ETF is flat, up at all, or down 7.5% at expiration the spread will realize a 50.2% return (circled).

Due to option pricing characteristics, this option spread has a ‘built in’ 50.2% profit potential when the trade was identified*.

Option spread trades can result in a higher percentage of winning trades compared to a directional option trade if you can profit when the underlying stock/ETF is up, down or flat.

A higher percentage of winning trades can give you the discipline needed to become a successful trader.

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

The prices and returns represented below were calculated based on the current ETF and option pricing for XOP on 4/25/2024 before commissions.

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Wishing You the Best in Investing Success,