Given the rising geopolitical tensions in the Middle East, particularly surrounding potential conflicts between Israel and Iran, oil prices have surged by nearly $10 since the start of October. This situation suggests further increases in the price of crude oil in the coming weeks.
One strategy to capitalize on this is to trade the Energy Select Sector SPDR ETF (XLE), which tends to move in correlation with crude oil prices. With the possibility of a broader conflict impacting oil supply and market sentiment, XLE becomes an appealing vehicle for expressing a bullish outlook on oil prices.
The Trade:
A call spread has been chosen to define risk and take advantage of the anticipated short-term rise in oil prices. The specific trade is as follows:
- Buy the XLE $93 call option expiring on October 18, 2024, for $2.10.
- Sell the XLE $98 call option expiring on October 18, 2024, for $0.70.
This spread costs a total of $1.40 per contract (or $140 per one lot). At the time of the trade, XLE was trading around $92.75.
This strategy allows for a capped profit potential if XLE moves above $98 by expiration, while keeping the initial investment relatively low and risk well-defined. The main driver here isn’t just the potential supply disruption from Iranian oil production but also the market’s fear of a broader war in the region, which could further drive oil prices upward.
