XEG options trade idea - How do you guys feel about it?

B

badlucktrades

XEG is a Canadian ETF for energy sector. It currently pays a dividend.

Some of its heavy hitter allocations are
SU @24%
CNQ @18%
CVE @ 8%
=50%
remaining is smaller companies at about 2% or less.

I'm assuming that - IF the entire canadian energy sector gets wiped out due to extremely low oil prices, this ETF will go to shit and lose probably half its value. I don't know what the likelihood of this happening is. I think that's a worse case scenario.

So this trade will be a 100% loss or gain type of trade.

I will commit 5% total portfolio to this trade broken down over 5/6 entries. Reassess situation once 50% of this has been committed.

Expected pivot points to where entry will be made.
10.00
9.50
8.50
7.50
6.50
5.50
3.50
1.50
0.50

Depending on where it sits next friday, sell an ITM put nearest the underlying price, with expectation of being put shares. Same time, sell a front month call of same or slightly OTM strike.

If trade ends up profitable - good.

If trade continues downward - wait until next pivot point, and repeat. Continue to lower cost basis of trades.

Repeat until 5% max risk is reached.

What do you guys think?
 
I think they are about 70% correlated to USO.

I have two technical possibilities here:

1) Oil goes down to $24 area.
2) Oil goes down to $10 area.

I don't follow oil too much in terms of major events or how it reacts. I've never been good at predicting this. However, what I have heard is -

1) Iran is planning on entering the oil market
2) Saudis aren't lowering production.

Actions by M.E oil producers IMO is based on the following:
- Expectation that iran is entering the oil market, will mean there is an additional producer which will drive oil prices down. I think this has already begun to be priced in.

- In order to compensate for Iran's entry, one producer will have to be eliminated - North american producers. This could bring oil prices back up to levels before the expectation that iran was going to enter the market. This is why they are continuing to flood the market - maintain control.

So, once you start to see North American producers failing/getting bought out, then I am expecting to see a pull back in production. Iran will make its entry, oil prices will start to go back towards price levels similar to before their entry.


If the 24 and 10 areas are hit, i think XEG will reasonably be between $5-$7.

I think overall a better play would be a total oil market etf play. Do you know any canadian total oil/energy market etfs?
 
badlucktrades said:
Depending on where it sits next friday, sell an ITM put nearest the underlying price, with expectation of being put shares. Same time, sell a front month call of same or slightly OTM strike.

If trade ends up profitable - good.

If trade continues downward - wait until next pivot point, and repeat. Continue to lower cost basis of trades.

Repeat until 5% max risk is reached.

What do you guys think?
More...

At the highest level, I love lowering cost basis for a trade. Extremely smart and it ALWAYS increases your chance of being profitable on a given trade.

XEG just broke those Sep lows which means that it could have more continuation downward. If you have the expectation of being put shares, why not look at a laddered put strategy? Front month sell 1 strike OTM, second month sell 2 strikes OTM, third month sell 3 strikes OTM. If you are expecting on getting put shares, why not just collect theta while you wait to be put those shares?

As for the call side, I like it - if I was selling calls here, I'd look for anything from 66% - 84% OTM based on risk preference.
 
jonny1lot said:
At the highest level, I love lowering cost basis for a trade. Extremely smart and it ALWAYS increases your chance of being profitable on a given trade.

XEG just broke those Sep lows which means that it could have more continuation downward. If you have the expectation of being put shares, why not look at a laddered put strategy? Front month sell 1 strike OTM, second month sell 2 strikes OTM, third month sell 3 strikes OTM. If you are expecting on getting put shares, why not just collect theta while you wait to be put those shares?

As for the call side, I like it - if I was selling calls here, I'd look for anything from 66% - 84% OTM based on risk preference.
More...

Thanks for the idea of a laddered trade. I never considered doing that.
I dont think i am ready to tie that much capital in at once and it hasnt hit those price levels to open up the strikes.
As for the calls, it leaves a lot of upside risk, especially if i am not put the shares.
 
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