DailyPlay – Energy Sector ETF (XLE) –  January 3rd, 2022

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Market Outlook:

We end 2021 on a generally positive note with equities closing the year near all-time highs despite the slight pullback on Friday. SPY rallied an impressive 26.9% in 2021 and outperformed the Nasdaq-100 over the course of the year. As we move onto 2022, we note that the Defensive leadership in equities has started to fade in recent days with growth stocks starting to rebound relative to value. Rotation out of Staples and Utilities and into Discretionary and Energy has been strong and points to the rally experienced by the major indices in recent weeks. 

XLE Bullish Trade Idea:
Our bullish trade today is the Energy Sector ETF (XLE). XLE has huge exposure to oil prices that are still experiencing a steady recovery since pandemic lows and maintain their bullish trend with price continuing to form higher highs and higher lows. XLE’s 1M trend turned bullish on Friday and with a Technical Score of 8 (out of 10), XLE is a strong ETF that will likely continue higher. 

As this is a call diagonal, the idea of this strategy is to purchase the $55 call which gives longer-term bullish exposure. The shorter-dated short leg is used to reduce the cost basis. Approaching expiration, we will likely buy to close the short leg for and sell another shorter-dated call to once again reduce the cost basis. This trade takes advantage of the fact that the shorter-dated options will experience accelerated time decay relative to the longer-dated call and by effectively “rinsing and repeating” the selling of the short leg, investors are able to reduce the cost basis of the long leg and reduce the breakeven price for the overall trade in the months to come. 

To learn more about this strategy, please watch the video below:

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