The Key Level to Watch on This Energy ETF

XLE's July 66 call has seen the most action over the past two weeks, with data pointing to buy-to-open activity

by Karee Venema

Published on Jul 10, 2017 at 3:14 PM

As the stock market has been carving out record highs in 2017, oil prices have been wallowing to new lows. The Energy Select Sector SPDR Fund (XLE), for instance, bottomed at $63.29 last Friday, July 7, it's lowest point since April 2016. And while Schaeffer's Senior V.P. of Research Todd Salamone noted XLE is nearing a "hesitation point" in this week's Monday Morning Outlook, the exchange-traded fund's (ETF) trend seems poised to continue lower.

At last check, the shares were trading at $64.29, after earlier skimming the $63.78 mark. However, Salamone suggested XLE's slide could temporarily stall near the $62-$63 region, which is "20% above the 2016 low and 20% below the 2017 high." Additionally, this area coincides with a 23.6% Fibonacci retracement of the fund's decline from its 2014 top to its 2016 bottom, as well as peak front-month put open interest of more than 20,500 contracts at the July 62 strike. 

xle weekly price chart july 10

Overall, though, options traders have been buying to open calls over puts at a quicker-than-usual clip on XLE in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), XLE options traders have bought to open 27,919 calls in the past 10 sessions, compared to 9,960 puts. The resultant call/put volume ratio of 2.80 ranks in the 90th annual percentile.

Drilling down, the fund's July 66 call was the most active option over this time frame, with 21,852 contracts traded. Data from the major options exchanges confirms noteworthy buy-to-open activity here, meaning options traders are betting on XLE to break out above $66 by front-month options expiration at the close on Friday, July 21.

XLE most recently traded north of $66 -- which coincides with its 10-week moving average, a trendline that's ushered the shares since January -- in last Monday's holiday-shortened session. Regardless of where the energy fund settles at next Friday's close, the most options buyers stand to lose is the initial premium paid. And with the ETF's Schaeffer's Volatility Index (SVI) of 18% docked in the 25th percentile of its annual range, it seems low volatility expectations are being priced into XLE's short-term options -- a potential boon to premium buyers.

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