Few sector exchange trade funds have been as talked about over the past several months as the Energy Select Sector SPDR (NYSEArca: XLE), but all the chatter and controversy is not keeping some options traders from betting XLE’s recent resurgence has more room to run.
For the 10 trading sessions ending Feb. 5, “investors bought about 60,000 June $84 calls and about 59,000 June $89 calls. Buying action was also heavy in February $80 calls and March $80 calls,” reports Steven Sears for Barron’s.
Perhaps not coincidentally for the week ended Feb. 5, XLE added over $944 million in new assets, a total surpassed by just three other ETFs over that period. Year-to-date, investors have added over $904 million to XLE, the largest equity-based energy ETF, good for the largest inflows among all sector ETFs. [Investors Flock to Energy ETFs]
“Goldman Sachs, meanwhile, is advising clients to buy XLE and also sell XLE’s January $70 put that expires in 2016 and January $90 call that expires in 2016. The “short strangle” expresses a view that XLE rises to $90 by January, while obligating investors to buy XLE, or sell the existing position, below $70,” according to Barron’s.
Some investors are making even more ambitious bets on an energy sector rebound. As of Feb. 3, year-to-date inflows to the Direxion Daily Energy Bull 3X Shares (NYSEArca: ERX) reached nearly $172 million, helping boost the ETF’s shares outstanding count by 66%. ERX attempts to deliver three times the daily performance of the S&P Energy Select Sector Index, XLE’s underlying index.
While the options market can be a useful indicator, it is not 100% accurate. For example, longer-dated options on some of XLE’s largest holdings were recently pricing in the possibility of dividend cuts by those companies. [Dividend Issues for Energy ETFs]
However, Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies and XLE’s two biggest holdings, recently announced capital spending reductions that included buyback cuts and suspensions, but no negative dividend news. Schlumberger (NYSE: SLB), the world’s largest oilfield services provider, recently announced a 25% dividend increase, bringing its payout to $2 per share per year. The stock is XLE’s third-largest holding.
Energy Select Sector SPDR Fund
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.