Even before the unrest in the Middle East, oil was extremely volatile.
By late September, West Texas Intermediate (WTI) crude was pushing toward $100 a barrel after trading around $67 in June.
The Organization of the Petroleum Exporting Countries (OPEC) extended its production cuts, driving that rally and putting a real squeeze on supply.
But suddenly, the oil price reversed on September 27.
In about a week, it fell from just under $94 a barrel to around $84.
The Energy Select Sector SPDR Fund (XLE) is an ETF that invests in oil and gas companies like Exxon Mobil (XOM) and Chevron (CVX). And as a result of that price drop, XLE plunged around 10%.
Yet for those who were prepared, this price action smelled like an opportunity.
And in The Opportunistic Trader, it gave us the setup for nearly 60% win.
Let’s see how it unfolded…
Looking for a Bounce
In the chart below, you can see XLE’s strong rally from the middle of the year. By the time it topped out in mid-September, it had risen over 20% from its June lows.
Energy Select Sector SPDR Fund (XLE)
Source: e-Signal
The relative strength index (RSI) is a momentum indicator. And it bullishly tracked in the upper half of its band (above the green line) throughout XLE’s rally.
But after XLE peaked at “A,” the RSI started tracking lower. And it then tested support (green line)…
The RSI did initially rally off this level… but it was unable to gain any traction.
Instead, it rolled over, locking in a lower high at “B.”
The RSI continued to slip down, and this time, sellers overwhelmed the buyers. The RSI broke through support and into its lower band.
Yet if a stock gets sold off too far, this type of scenario can cause a stock to eventually rebound.
The RSI was closing in on oversold territory (lower gray dashed line), so we had our eye out for a potential bounce.
Then the RSI formed a “V” and rose higher (orange line).
So we bought a call option on October 5, taking out a long position on XLE. Take another look:
Energy Select Sector SPDR Fund (XLE)
Source: e-Signal
When the underlying stock price rallies, call options should increase in value. And that is what we saw…
The day after entering our position, XLE closed out slightly higher. It rallied further after the weekend.
That put our position in good profit.
Yet now the RSI was running up against resistance (green line). That was causing XLE’s bounce to fade.
So we sold our call option on October 10 for a 59.5% profit in just five days.
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To be clear, we used options to generate this level of profit. Had we just bought XLE shares instead, our profit would’ve been smaller.
Yet that’s the power of options – and one of the reasons they’re among my favorite trading tools.
If you haven’t explored options before, I’d encourage you to give them a look. To learn how they can bring you profits like these, simply go right here for a full briefing.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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