Last update: August 2021
The energy sector has four liquid ETFs that you can trade. Today I’m going to share why I favor XOP above all the rest when it comes to selling naked puts or covered calls.
The four tickers in the running are as follows:
XLE, XOP, OIH, USO
I previously outlined (in excruciating detail) why I dislike USO. The same logic stands, so if you want to understand why that ETF is off the table for me then go read the May edition of the Trading Justice Newsletter.
The other three ETFs are all baskets of energy stocks. XLE is heavily weighted toward Chevron and Exxon Mobil so it’s driven by the big boys and has less volatility than the other two. That means I find richer premium available in OIH and XOP.
Over the past decade or so, XOP has held up better than OIH. Additionally, ever since OIH underwent its reverse split, the share price is too high to make naked puts feasible.
For all of those reasons, XOP is my top pick for cash flowing the energy sector.
The Personality of XOP
XOP trades with lofty implied volatility at 50%. Comparatively, the S&P 500 is only around 20%. This translates into richer premiums available for XOP stock options.
And then there are the ample strike prices available. They’re listed in $1-increments giving you the ability to sell whatever delta you desire. And did I mention the liquidity is awesome? The bid-ask spreads are tight allowing for quick entries and exits.
With XOP trading near $72, take a look at all the OTM put strikes with values greater than 50 cents. I count 14 of them ($58 to $71).
Here’s the bottom line – it’s supremely easy to cash flow this oil-based fund when buyers are in control. And by “supremely easy,” I mean you can always find a low delta OTM put to sell that offers a compelling return on investment. After two years of seeing XOP plumb the depths, submerged beneath an impenetrable 200-day moving average, I’m ecstatic that this ticker is once again in an uptrend.
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One Reply to “Options Theory: Why XOP is my Favorite Oil ETF for Cash Flow”
thanks Tyler .. one of my 2021 trading goals .. is to become a predominately a “Cash Flow” trader .. your post appears to be a good start to accomplish that goal
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