Major Energy ETF in the 'Buy Zone'

February 25^th, 2022

Major Energy ETF in the ‘Buy Zone’

Dear Reader,

Yesterday, we looked at a Daily Price Chart of Amphastar Pharmaceuticals, Inc. noting the stock’s 24/52 Day MACD line is above the 18-Day EMA.

For today’s Trade of the Day we will be looking at a Keltner Channel chart for the Energy Select Sector SPDR Fund ETF, symbol: XLE.

Before breaking down XLE’s daily Keltner Channel chart let’s first review the investment objective of the ETF.

The XLE ETF seeks to track the performance of the index, the fund employs a replication strategy. It generally invests substantially all, but at least 95%, of its total assets in the securities comprising the index. The index includes securities of companies from the following industries: oil, gas and consumable fuels; and energy equipment and services.

Now, let’s begin to break down the Keltner Channel chart for XLE. Below is a Daily Price Chart and the three Keltner Channels for the XLE ETF.

Buy XLE ETF

The Hughes Optioneering Team uses the Keltner Channels as an indicator to determine whether an ETF is overbought or oversold. If an ETF’s daily share price is trading above the upper Keltner Channel, this signals that the ETF is temporarily overbought and subject to a retracement.

Even ETFs that are in the strongest bull trends do not advance in a straight line. There are always price retracements along the way. When an ETF becomes overbought, it’s price will typically decline soon after as the inevitable profit taking occurs.

The XLE daily price chart shows that the ETF is in a strong price uptrend and has become overbought several times. You can see this as XLE has traded above the Upper Keltner Channel on multiple occasions recently.

But, in every scenario when XLE became overbought, the ETF soon experienced a pullback.

Finding opportunities when an ETF experiences a pullback is why the Hughes Optioneering Team uses the Keltner Channels. They help us find a lower-risk entry point.

The Keltner Channel “Buy Zone” occurs when an ETF is trading below the upper Keltner Channel. Once the daily price is trading below the upper channel, it provides a lower-risk buying opportunity as the ETF is likely to rally.

Our initial price target for the XLE ETF is 72.15 per share.

82.3% Profit Potential for XLE Option

Now, since XLE has retraced in the Keltner Channel ‘Buy Zone’, this offers a prime trade entry opportunity. Let’s use the Hughes Optioneering calculator to look at the potential returns for an XLE call option purchase.

The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat XLE price to a 12.5% increase.

The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following XLE option example, we used the 1% Rule to select the XLE option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.

Trade with Higher Accuracy

When you use the 1% Rule to select an XLE in-the-money option strike price, XLE only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if the XLE ETF is flat at 67.11 at option expiration, it will only result in a 6.2% loss for the XLE option compared to a 100% loss for an at-the-money or out-of-the-money call option.

Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.

The goal of this example is to demonstrate the powerful profit potential available from trading options compared to ETFs.

The prices and returns represented below were calculated based on the current ETF and option pricing for XLE on 2/24/2022 before commissions.

When you purchase a call option, there is no limit on the profit potential of the call if the underlying ETF continues to move up in price.

For this specific call option, the calculator analysis below reveals if XLE increases 5.0% at option expiration to 70.47 (circled), the call option would make 38.1% before commission.

If XLE increases 10.0% at option expiration to 73.82 (circled), the call option would make 82.3% before commission and outperform the ETF return more than 8 to 1.

The leverage provided by call options allows you to maximize potential returns on bullish ETFs.

The Hughes Optioneering Team is here to help you identify winning trades just like this one.

Interested in accessing the Optioneering Calculators? Join one of Chuck's Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.

Chuck's Trades Are Within Your Reach

Do you want to start receiving hand-picked trades from 10-Time Trading Champion, Chuck Hughes?

As a Trade of the Day subscriber, Chuck is offering you a special discount on his Weekly Option Alert Trading Service.

To join, click here to schedule a call! You can also call them at 1-866-661-5664 or 1-310-647-5664 to join and use the code "Optioneering VIP" to receive special pricing!

Wishing You the Best in Investing Success,

Chuck Huges Signature

Chuck Hughes

Editor, Trade of the Day

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Major Energy ETF in the 'Buy Zone'

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