Trading Nation

Two ways to play the energy space as oil surges past $68, according to trader

Share

In this article

VIDEO3:3303:33
How to play the energy stocks as crude oil takes off, according to trader

Oil's rally is hitting the gas.

West Texas Intermediate gained another 1% on Wednesday, pushing it well above $68 a barrel, after OPEC+ doubled down on its decision to ease supply restrictions through July to keep up with demand.

As WTI crude traded at its highest level since October 2018, energy stocks rallied alongside it. The XLE energy ETF added nearly 2%, pushing its two-day rally close to a 6% increase.

Todd Gordon, founder of TradingAnalysis.com, said recent gains have propelled energy stocks to break through a stubborn area on the charts.

"You can see that we have moved down into this old shelf of support here that was in play through 2019. We broke down in 2020 and the beginning of Covid, we're coming back and we are retesting several times here," Gordon told CNBC's "Trading Nation" on Wednesday. "We're trying to get up through that resistance into about $55 here. So looks like we should be able to poke through there."

The XLE ETF closed at $55.23, above $55 for the first time since February 2020.

"Looks like the reopening is here, Covid cases are hitting new lows every month, summer driving season is here, I think there's a lot of pent-up demand as the economy is reopening, we're continuing to see the rotation into the reopening plays like energy, like materials, like industrials," said Gordon.

The XLE energy ETF is by far the best-performing S&P 500 sector this year, rising by more than 45%. The S&P, by comparison, is up 12%.

Gordon said there are two ways an investor can gain exposure to more upside – outright buying the XLE ETF or using options.

"If you want to buy the XLE, that's absolutely fine here. I think you can put a stop loss just below the $50 mark. We're trading $55 so $5 of risk," he said.

For investors who want to use options, Gordon said one could buy a 55 call with July 16 expiration, sell a 60 call.

That's "a $5 spread for which you're paying $1.43. Take the $5, subtract the premium paid … leaves you about $3.50 … in potential profit in this trade," he said. 

Disclaimer