Finally, some life in the energy space.
This is a tough, tough area right here, right now. And I mean right now. The reason is there are so many stocks in the space that look like they are breaking out and ready to ride a momentum reversal wave.
Oil has erased losses for the year and now I have several names popping up on the breakout screener this morning. Oxypetroleum (OXY), Rosetta Resources (ROSE), Bill Barrett (BBG), Cabot (CBT), Transocean (RIG) and Halliburton (HAL) lead the list in terms of breakout ranking, but I can tell you they weren't the only ones on the list. But here's the challenge: risk vs. reward.
OXY looks good here, but better over $83.25. BBG isn't bad here, but better over $12. Cabot would probably have a clearer path over $45 and HAL over $44. Really only RIG and ROSE look like they have air about them right now. Unfortunately, waiting for any of those first four to get to a cleaner space means giving up some decent upside and pursuing them at extended levels. On top of this, support is really 7-10% lower on most of these names. You would really be buying these against the lows of the year as a stop.
So, it becomes decision time.
One approach would simply be to an ETF like the Energy Select Sector SPDR (XLE). Another approach would be to buy smaller sizes in each names and maintain individual stops on each. One could wait for a confirmed breakout by the prices mentioned above, but I would view this as the least desirable approach. Instead, I'd rather look to sell put spreads here, taking advantage of the volatility in the space and actually using the closet strike as the short put and the recent lows as the long put. The reasoning here is if those lows are broken, it is likely going to be a quick whoosh lower. I would have stops set there anyhow, so I would be looking at a loss on the difference between the current price and the stop price.
While I don't enjoy upside participation with the put spreads, I do have a smaller stop loss due to the net credit, plus, I have a known loss and time on my side. I also eliminate gap risk, which is big here. If I were to buy something like OXY and the stock fell close to my stop of $75, but didn't hit it. I could carry an overnight risk with the stock, say, at $76 and wake up to a price of $71. On the other hand, if I sell the March $80-$75 put spread for a $1.25 net credit, then I know my max risk is $3.75. Also, I would only realize my max risk in the short term if the stock fell significantly below $75, likely into the $60s.
My other considerations here would be simply using calls or call spreads. Again, I want to absolutely define my risk as well as spreading my risk. I'm a little hesitant to chase, so I would rather look to leg into some put spreads here, selling some later today as I want to watch the early action, then selling some more only if we pull back a bit. Again, I'm not in a hurry to chase.