Bears Target A Familiar Energy ETF

Hopes of a legitimate rebound in oil prices and the related exchange-traded funds were dealt a blow last week when the United States Oil Fund USO, which tracks West Texas Intermediate futures, slid 2.6 percent.

Slumping crude prices often pressure some equity-based ETFs, including the widely followed and heavily traded SPDR S&P Oil & Gas Explore & Prod. (ETF) XOP. XOP, an equal-weight ETF dedicated to oil and gas exploration and production firms, lost nearly 1 percent last week, bringing its year-to-date loss to about 23.6 percent.

The $2.1 billion XOP tracks the S&P Oil & Gas Exploration & Production Select Industry Index and is a favorite of professional traders, both bullish and bearish, because of the fund's reputation for volatility and its often-intimate correlations to oil prices.

Options Bears Rush In

Data indicate bearish options traders are targeting XOP, which can be seen as a sign professional traders are betting on more downside for oil futures.

Last Friday, “we have seen downside put interest in a name that has become much more familiar to many given the drubbing that Oil prices and related Energy names have taken in the past several months. XOP (SPDR Oil & Gas Exploration & Production) September 31 puts are trading today on weakness in the underlying ETF and the segment in general, and trading action in the fund itself reflects a '180 degree' type move inside of the past twenty-four hours,” said Street One Financial Vice President Paul Weisbruch in a note.

That adds to an already bearish pall surrounding XOP. As of July 17, only three ETFs had larger short interest than did XOP, according to ETF.com data. Of the 15 most shorted ETFs as of that date, four, including XOP, were energy funds. 

Another Idea

Active, risk-tolerant traders looking to take advantage of further downside in XOP can also consider the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP. DRIP attempts to deliver triple daily inverse returns of the S&P Oil & Gas Exploration & Production Select Industry Index, the same index XOP tracks.

DRIP and its bullish counterpart, the Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares GUSH, debuted just over two years ago. To this point in the third quarter, traders have added nearly $11 million in new money to DRIP.

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