If Stocks Zap Your Portfolio, Follow the Path of Least Resistance

I’m charged up about energy.

I have increased my exposure here over the past couple of weeks, despite the likelihood of a recession. Several reasons exist for my outlook for the sector. For one, rarely has oil and gas seen more headwinds from a presidential administration, which has helped oil production fall from its recent peak. The industry has also been significantly hit by the whole green “ESG” movement. Funding for big, long lasting energy projects around the world have fallen precipitously for a better part of a decade now. These are projects that take years and many billions of dollars to come online. This is not good for the long-term supply/demand situation and most likely will mean a higher “floor” for both oil and natural gas prices going forward. This should be mean companies with proven reserves will be valued more highly going forward as well.

Also, the world is seeing an uptick in geopolitical volatility, which is likely to remain with us a while. The situation in Ukraine has evolved into a war of attrition for the most part in recent months, a very bloody stalemate. Europe has gotten through winter better than most expected in regard to energy supplies. The continent did a commendable job filling their energy storage capacity to the max prior to winter setting in and has been blessed with mostly mild temperatures during the past few months. This has helped bring both crude and natural gas prices down in Europe. But the situation is evolving and has the potential to take another turn for the worse.

Energy prices jumped on Friday as Russia announced it was taking 500,000 barrels per day of production off the world markets in response to western sanctions on the country. Russia appears to be massing additional equipment for a significant new offensive. If so, it has the potential to roil the energy markets once again.

My recent energy sector additions to my portfolio, EOG Resources (EOG) , High Peak Energy (HPK) and Phillips 66 (PSX) have stood up well in the decline in the markets this week but still make solid covered call candidates. An easy way to gain both exposure to the energy sector as well as diversification is to establish a stake in the Energy Select Sector SPDR ETF (XLE) via covered call orders. Options are very liquid against this exchange-traded fund and the return is acceptable, given it eliminates company-specific risk. The ETF also currently pays north of a 3% dividend yield, which provides a nice additional bit of return with this strategy.

Option Strategy:

To establish an initial position in XLE using a covered call strategy, do the following. Selecting the September $90 call strikes, fashion a covered call order with a net debit in the $81.70 to $81.90 a share range (net stock price – option premium). This strategy provides downside protection of approximately 9% and 12% of upside potential, including dividends, even if this stock does nothing over the option duration.