2 Energy ETFs to Watch as Oil Prices Rise

Energy ETFs XLE and UNG are offering options at a bargain, from a volatility standpoint

Kirra Fedyszyn
Mar 29, 2017 at 3:47 PM
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The energy sector is booming today, after crude oil prices surged on a smaller-than-predicted rise in U.S. stockpiles. As such, we're checking in with a pair of exchange-traded funds (ETFs) that are benefiting -- the Energy Select Sector SPDR ETF (XLE) and United States Natural Gas Fund (UNG). While the shares of XLE and UNG are climbing, options traders are busy. And it looks like it may be a prime time for short-term speculators to get in on the action.

Options Traders Buy Calls on XLE

Shares of XLE are up 1.4% at $70.17. After sliding down the charts since mid-December, and losing two key areas of technical support, the ETF bounced yesterday near $68 -- home to the 60-week moving average, which the shares haven't closed beneath since early June. Despite a nearly 7% year-to-date deficit, however, the options crowd has been largely optimistic of late. In fact, the ETF's 10-day call/put volume ratio of 2.24 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) rests just 2 percentage points from an annual high.

Today, however, it's puts that are in high demand, crossing the tape at three times the typical intraday pace, and outnumbering calls by a more than 4-to-1 margin. Accounting for most of this activity is the deep out-of-the-money May 63 put, where a block of 80,000 contracts traded this afternoon. But according to Trade-Alert, this block -- tied to 560,000 XLE shares -- was likely sold to close. Regardless, it looks like call buyers are still active, with buy-to-open action spotted at the weekly 3/31 70-strike call.

Buyers of near-term options could be getting a bargain on Energy Select Sector SPDR ETF at the moment, as the market is pricing in unusually low volatility expectations. This is per the fund's 30-day at-the-money implied volatility (ATM IV) of 16.1% and its Schaeffer's Volatility Index (SVI) of 17%, which rank in the 7th and 16th percentiles of their respective annual ranges.

UNG Options Buyers Could Score a Bargain

Despite climbing 18% off its late-February lows -- up 2% today at $7.64 -- UNG is still deep in the red on a year-to-date basis. Plus, further gains could be capped in the $7.75-$8.00 neighborhood, which previously served as support numerous times in the past year, and currently coincides with the 320-day moving average. Options traders have taken a skeptical approach, and have bought to open 1.29 puts for each call over the last 10 sessions on the ISE, CBOE, and PHLX -- a ratio that arrives in the 93rd annual percentile.

Puts continue to be popular today, with nearly 33,900 contracts on the tape -- seven times the expected intraday rate. Most active are the July 6 and 7 puts, where one trader initiated a massive spread of 15,000 contacts at each strike this morning, where it looks line one trader closed out of a spread that was initiated on Feb. 21, when UNG was trading near $6.55.

Current expectations from the options market are certainly aligned in the favor of near-term options buyers. Not only does the United States Natural Gas Fund's SVI of 33% rank lower than 99% of the past year's readings, but its 30-day ATM IV tapped a 52-week low earlier today, and was last seen in the 1st annual percentile, at 34.6%. Simply stated, short-term UNG options are pricing in historically low volatility expectations at the moment.

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