Buy an Energy Fund and Its Related Options

Wow, what a busy week it has been!

We launched ETF Trader’s Edge one week ago today and our first few trades have gotten us started with BIG PROFITS! Last Wednesday, we purchased the double-long ProShares Ultra Gold Miners exchange-traded fund (GDXX) and sold it Thursday for a 16% gain. At the same time we purchased a call option on the SPDR Gold Shares ETF (GDX) and sold that position on Monday for a 104% gain.

While we were on the subject of gold, Tom and I noticed that gold had just moved too far too fast, so as we sold our positions we decided it was a good entry point for us to take a short side trade in gold. As a result, we bought the double-short ProShares UltraShort Gold Miners ETF (GDXS) and a March $17.50 put option on GDX (GDX160318P00017500). These are positions that we only expect to hold for a limited time. They are both in the money now (profitable) and are okay to add to your portfolio today. This is what ETF Trader’s Edge is designed to do with short-term trading!

Let’s step back a moment and talk about the broad market. We have been in a severe correction since the start of 2016. The market has been down hard so far this year, losing 10% in the S&P 500 and much more in many other markets around the world. Tom and I are expecting the market to bottom soon and run higher short term. We are starting to build into positions that would benefit from a higher overall market.

This is going to be a bear market rally, not the return of the bull. We have taken a position in the utilities sector for a short-term trade with a Utilities Select Sector SPDR Fund (XLU) March $46 put option (XLU160318P00046000). On Friday, we recommended purchase of a Financial Select Sector SPDR Fund March $21 call option (XLF160318C00021000). Today, we are advising you to buy the ETF United States Oil Fund (USO) along with a related call option. All of these trades should do well in a rising market, while gold is likely to pull back a bit more. In our opinion, gold is moving into a new bull market, so we don’t plan to overstay our short-side trades.

BUY United States Oil Fund (USO), which is trading around $8.

BUY USO March $8 Calls (USO160318C00008000), which are trading around $0.75.

Here is a bit of further commentary on why we own the following current positions.

XLU March $46 Puts
XLU is currently trading around $46. We will make money on this position if XLU falls in value. We expect XLU to drop in value when the broader market rallies. Why? Because XLU has been a safe-haven trade, up 2.53% month to date and 7.60% year to date as of Tuesday’s close, while the broad markets are down more than 9%. When we entered this trade, the XLU ETF was in overbought territory and remains firmly there. We continue to believe these overbought conditions will be worked off. If the market rallies, we will see funds flow out of this sector as quickly as they came in. At this point, investors are just as worried about missing a rally as seeing more market downside.

XLF March $21 Calls
XLF is currently trading around $20. We will make money if XLF rises in price before the call option’s March 18 expiration. This position still remains a buy — we believe XLF is going to rally with the broad market because the fear of bank failures is misplaced.

USO March $8 Calls
We all know how volatile oil is with USO down 25% year to date. But markets don’t move in straight lines. If we are correct in our assumption that the broader market is poised to rally, USO will rally as well. On Tuesday, USO bounced near its 52-week low of $7.92 and we believe it will continue to trade higher in the days ahead.

Finally, as we move into the Chinese New Year, the year of the Fire Monkey portends a year of market mischievousness and volatility. As always, trade when you can and not when you have to.

Best,

Doug and Tom