XLE Option Bottom Feeders Get Fed on Thursday

XLE Unusual Option Activity Report

As the stock market was reeling into the close on Wednesday, a big fish entered the waters of XLE and took a large bite. That bit was a significant amount of option long call option contracts betting on a big move. The initial stages of a bullish move appeared on Thursday following a shaky open. The result was a high-volume bullish candle on XLE.

As you consider energy stocks, particularly oil companies, it’s not a slam dunk. These companies are having a hard time and is evidenced by the cost-cutting measures that these companies are taking. Exxon Mobil (NYSE: XOM) is a great example. The company announced that they will be cutting 1,900 jobs on Thursday.

A bullish trade on energy is less about perfect fundamentals and more about a significant retracement. A high reward, low risk approach seems to be the order of the day with these companies.

Peacock Flounder

XLE Option Activity

This is the third report that I’ve done over the past few weeks on energy stocks which are XLE components. You can read the posts here and here. They’ve all experienced bullish option activity. The other big option days were on October 8 and October 21.

Is this the signal that is finally going to see some big movement in the energy sector?

That is impossible to know ahead of time. However, this trade is bigger, and it is using a shorter timeframe than others that we’ve discussed. Let’s look at the details of the activity:

• 90,392 20 NOV 20 $33 call mostly BOT @ $0.25 to $0.27 against an open interest of 8,486

The fact this trade occurred on Wednesday allows us to look at how much of the activity was opened or closed. While there were 90,000 contracts traded, the open interest only increased around 21,000. That’s still significant but shows that a lot the activity was day trading near the close of the session.

XLE Technicals

The price of XLE closed below the October 2 support at $28.20 on Wednesday and it did it on significant volume. This is reflective of the difficult market that we’re in.

The price formed a bullish candle formation on Thursday. The price opened below Wednesday’s low of $27.55 and closed above the high of $28.39. Thursday’s body entirely “engulfs” the previous day. Thus, the name of the pattern is a bullish engulfing pattern. Given the difficult climate we’re in, it may pay to see the price close above today’s high as confirmation.

Conclusion

There are headwinds for the energy market as governments look to close off the economy as COVID cases surge. However, energy stocks are significantly oversold and options allow you to setup a high reward and low risk trade in the event of a big move in XLE.

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