Energy stocks began falling a year ago but since the start of 2015 the ETF tracking the sector (trading under the symbol XLE) has been fairly range bound. And one trader presents a way to profit if the sector continues to stay within that tight range.
Since November, the XLE has been in a range mostly between $72 and $82. In fact, it opened on Friday nearly in the middle of that, at $77.38.
"It's pretty simple: We get to $72, we find buyers and when we get to $82, we find sellers," explained Andrew Keene, founder of Keene on the Market.
He expects the XLE will remain in that range at least until the end of the year. Though going long shares of the ETF may not see much return if it remains range bound, Keene is looking at a complex options strategy to take in income from the range.
On the upper end of the range, Keene is selling a December 84/86 bear call spread. That position requires him to sell call with a strike at $84 while simultaneously buying one with an $86 strike, both expiring toward the end of the year. A call is a bullish bet giving the purchase the right to buy a stock at a set price within a given time frame.
On the lower end of the range, Keene is selling a December 72/70 put spread. In the position, he is selling the 72-strike puts while buying 70-strike puts, expiring on the same date as the call spread. A put is a bearish bet giving the purchase the right to sell a stock at a set price within a given time frame.
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The combination of selling the two spreads is known as an "iron condor." Keene is taking in a total of $100 each time he executes this trade, and doesn't stand to lose more than $100.
"Risk versus reward is 1-to-1," he said. "I make money between $71 and $85."
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