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Trader is shorting energy stocks to triple his money

Unfortunately for investors banking on the energy rally, stocks in the sector could be set to fall over the next few months, according to AlphaShark's Andrew Keene.

The energy stock-tracking ETF (XLE) has climbed over 2 percent in the past week, fueled by a surge in crude oil and leading the market to new record highs. But Keene sees trouble in the charts for XLE, despite seemingly optimistic signs.

"I think [XLE] can continue to go higher since we've been making higher highs and higher lows, but I think we're going to roll over," he said Monday on CNBC's "Trading Nation."

Looking at both the daily and weekly charts for XLE, Keene says energy stocks have broken above their 50 and 100-week moving averages, and as a result are "due for a pullback." XLE was trading just above $72 on Monday, but the trader thinks that the ETF could fall back to around the $67 or lower.


So to profit from the expected decline in the XLE, Keene is buying an options strategy that is most profitable if the XLE falls 8 percent, or to $67, by March. Specifically, he bought what's called a put spread, a structure that involves buying one put — in this case, the March 70-strike put, and offsetting a lower strike put, the March 67-strike put to mitigate some of the costs. Together, the trade costs $1, or $100 per options contract.

Keene is risking $100 to make a maximum reward of $300, meaning the trader could triple his money by shorting XLE.

"I think this is a good setup here to the short side, [so] I'm trying to accumulate some short positions here," said Keene.

The energy sector is up over 6.5 percent this month. Energy stocks have been among the biggest gainers since the U.S. election.


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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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