Oil’s precipitous fall continues. OPEC today cut its forecast for crude oil demand in 2015, which sparked a 4% fall in oil and brent crude prices. In direct correlation, oil stocks are getting punished again. Here’s a short list of oil stocks and their decline so far today:
XOM down 3%
CVX down 3.5%
DVN down 3.75
HOS down 6.5%
NBR down 5.6%
The list of beaten down oil stocks can go on and on, and many can’t seem to find a bid today.
As I’ve been noting, the fear in the market is that, at these depressed oil prices, many small or medium-sized oil stocks could be at risk for bankruptcy. However, picking the stocks that are most vulnerable and those that are best hedged is a tough game.
Therefore, if you believe in the long-term prospects of oil and oil stocks, the best way to play them is through LEAP options. LEAPs stands for Long-term Equity Anticipation Securities. LEAPS are options that have several years until their expiration and are available for most indexes and stocks.
So if you feel that the price action in oil stocks has gone too far, and that long-term the fundamentals are strong for the oil sector, you could buy an option that expires in January of 2017.
As I said, figuring out which stocks are most susceptible to this fall in the price of oil is difficult. So if you want to put on a bullish trade in the oil sector, I would recommend using ETFs such as the Oil Services ETF (OIH) or Energy Select SPDR (XLE). When buying the ETF, you get exposure to a wide group of oil stocks rather than take the risk of choosing just one or two stocks.
For example, here are some of XLE’s holdings and weightings:
Exxon Mobil: 16.88% weighting
Chevron: 13.32% weighting
Schlumberger: 7.42% weighting
Conoco Phillips: 3.79% weighting
So, as an example, if you wanted to buy a LEAP on the XLE, you could buy the XLE January 77 Call that expires in January 2017 for $8.00. This option gives the owner of the call two years for oil and oil stocks to rebound.
At some point, we may enter into such a trade. However, at this point, I’m waiting and watching for more aggressive call buying order flow in oil and oil stock options, which I have not yet seen. If and when I do send such a trade alert, please make sure to note the expiration date of the call I recommend.