Exploring Volatile Side Of The E&P ETF Trade

Perhaps it is a positive sign or maybe it is a harbinger of negativity to come, but the SPDR S&P Oil & Gas Exploration & Production ETF XOP is down just 1.3 percent over the past month. Over the same period, the United States Oil Fund USO, which tracks front-month West Texas intermediate futures, has plunged 12.3 percent.

In both bullish and bearish environments, there are times when energy equities can lag the moves in the underlying commodity. Some options traders are preparing for near-term declines in XOP, one of the most popular and volatile equity-based energy ETFs.

“We saw near dated options activity in infrequently traded XOP (SPDR Oil & Gas Exploration & Production, Expense Ratio 0.35%) yesterday, with November 37 puts trading in decent size (these expire on Friday). XOP rose sharply yesterday on its 50 day MA along with a bounce in other Energy related equities, which correlated to a spike in Crude Oil prices during the session after a much weaker open,” said Street One Financial Vice President Paul Weisbruch in a note out Tuesday.

Potential downside for XOP reveals opportunity with the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP. DRIP, which is a couple of weeks shy of its six-month anniversary, has climbed 30.5 percent since coming to market. That sounds impressive, but as is to be expected, DRIP is not a free lunch and is highly volatile. As recently as six weeks ago, DRIP's gain since coming to market was 158 percent. 

Underscoring DRIP's volatility is this factoid: Over the past 30 days, only one bearish leveraged Direxion ETF has been more volatile than DRIP. Likewise, only two leveraged bull ETFs have been more volatile over that period than DRIP's bullish counterpart, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares GUSH.

DRIP's 30-day variance against its underlying index, the same benchmark tracked by XOP, is -19.1 percent, according to Direxion data. GUSH has outpaced the S&P Oil & Gas Exploration & Production Select Industry Index by nearly nine percent.

With oil prices recently slumping, it is reasonable to expect to more upside for DRIP, particularly without production cuts from the Organization of Petroleum Exporting Countries (OPEC).

“In the oil exploration and production sector many have braced themselves for a protracted down market. Until now, analysts have concluded that oil prices will stay depressed without major production cuts from OPEC. Cascading shale supplies in North America and stagnant European and Chinese economies, along with a stronger dollar have crushed oil prices, along with stock prices within the sector,” said Direxion in a research note.