Oil ETF Hits Resistance At Key Level; Cash In On Downside With This Risk Option Strategy | IBD

TL;DR

A bearish option strategy, known as a bear call spread, is recommended for the Van Eck Oil Services ETF (OIH) due to the recent pullback in the oil and gas sector.

Transcript

[Applause] hey option traders for today's trade we are looking at a bearish option play in oil and gas etf the van eck oil services etf the oil and gas sector is pulled back after a long period of outperformance alongside oil prices so this etf typically performs poorly when oil stocks fall and with this there's also meaningfully less earnings risk... Read More

Key Insights

• 🫢 The oil and gas sector, along with the Van Eck Oil Services ETF, has experienced a pullback after a period of outperformance.
• 🥹 The top two holdings in OIH, SLB and HAL, can significantly impact the ETF's performance.
• 👻 A bear call spread is a credit spread strategy that allows investors to collect a premium upfront and profit if the stock price falls.
• 🧔 The maximum profit for a bear call spread is the total premium received, while the maximum loss is determined by the difference in strike prices.
• 😫 It is important to set rules for taking profits and managing losses in a bear call spread.
• 🤑 Practicing with a virtual account is recommended for beginners before risking real money.

Questions & Answers

Q: What is the Van Eck Oil Services ETF and why has it been struggling?

The Van Eck Oil Services ETF (OIH) is an exchange-traded fund that tracks the performance of companies in the oil and gas services industry. It has been struggling since June after a failed breakout attempt, facing resistance at key moving averages.

Q: What is a bear call spread and how does it work?

A bear call spread is an option strategy used when investors expect the underlying stock price to fall. It involves buying a call option with a given strike price and selling a call option with a higher strike price simultaneously. The investor collects a premium upfront and profits if the stock finishes below the higher strike call option.

Q: What are the maximum profit and loss for a bear call spread?

The maximum profit for a bear call spread is the total premium received upfront. The maximum loss is determined by the difference between the two strike prices of the calls in the spread minus the premium received. The breakeven point is the short call strike plus the premium received.

Q: What are the rules for taking profits and managing losses in a bear call spread?

It is recommended to take profits when the trade has achieved a profit equal to 50% of the premium received, especially if the profit comes in the first half of the trade. For managing losses, it is advised not to allow the loss to get bigger than 1.5 to 2 times the premium received. Rolling out a losing trade in time to the next expiration can also be considered, but only if it results in a net credit.

Summary & Key Takeaways

• The Van Eck Oil Services ETF (OIH) has been struggling since June after a failed breakout attempt, currently finding resistance at key moving averages.

• A bear call spread, a credit spread strategy, is suggested for investors expecting OIH to decrease in price.

• The strategy involves buying a call with a given strike price and selling a call with a different strike price to create a spread and collect a premium upfront.