Traders Get Nervous With E&P ETF

On the back of oil's rebound, the often volatile SPDR S&P Oil & Gas Exploration & Production ETF XOP is sporting a fourth-quarter gain of just over 20 percent with half of that surge coming just since the start of November.

Even amid the recent bullishness emanating from the oil patch, some options traders are preparing for a pullback, one of the most widely followed equity-based energy exchange traded funds among professional traders.

“We have seen some action in both the 34.50 and 33 strikes in XOP December puts, reflective of caution in the sector as this ETF has recently found support on its 200 day MA in the past couple sessions,” said Street One Financial Vice President Paul Weisbruch in a recent note. “XOP rallied nicely from the very end of October until mid-November where it staggered a bit, bringing it to present levels.”

Another Idea

Risk-tolerant traders looking to potentially amplify their returns, assuming XOP retreats, can consider the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP. DRIP looks to deliver triple the daily inverse returns of the S&P Oil & Gas Exploration & Production Select Industry Index.

Remembering that XOP is volatile, the same applies to DRIP in a big way. In fact, DRIP has been the most volatile of Direxion's inverse leveraged ETFs over the past month, according to issuer data. The Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares GUSH, DRIP's bullish counterpart, has been the second-most volatile of Direxion's leveraged bullish funds over that span.

Confirming traders' bearish view on exploration and production stocks, GUSH has averaged daily outflows of nearly $587,000 over the past month, according to issuer data.

Assessing Sentiment

“Year-to-date XOP has attracted very modest inflows to the tune of about $43 million in spite of seeing more than $125 million leave the doors via redemption pressure in the month of November alone,” said Weisbruch.

The index DRIP, GUSH and XOP tracks is an equal-weight index, meaning it features more small-cap exposure than a cap-weighted index. That can lead to increased volatility.

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