Unusual Option Activity in XLE: What You Need to Know

The XLE, otherwise known as the Energy Select Sector SPDR Fund, is an ETF that covers the energy space. Let’s dive into what the core holdings are, how it has performed recently, and how the smart money has been positioning throughout 2022.

Top 10 Holdings of the XLE

Name	Symbol	Allocation Percentage
Exxon Mobile	XOM	23.70%
Chevron Corp	CVX	20.03%
ConocoPhilips	COP	4.64%
EOG Resources Inc	EOG	4.46%
Schlumberger Ltd	SLB	4.43%
Marathon Petroleum Corp	MPC	4.17%
Pioneer Natural Resources Co	PXD	4.08%
Philips 66	PSX	4.07%
Kinder Morgan Inc Class P	KMI	3.85%
Williams Companies Inc	WMB	3.50%

Together, these ten companies make up more than 75% of the ETF, with more than 43% allocated between Exxon and Chevron Corp.

Why Trade the XLE Rather Than a Specific Energy Equity?

With a spread of industries ranging from oil, gas, consumable fuels, energy equipment and services, the XLE provides greater diversity.

Additionally, option traders take advantage of the XLE’s high option liquidity — the XLE’s open interest currently sits at 286,696, which is greater than the entire sum of its top ten holdings’ open interest combined. This generally indicates that traders will have an easier time entering and exiting positions, with more opportunity for favorable order execution.

XLE Performance in 2022

From the start of the year, energy was far and away the top performing sector of the S&P 500. This strength was carried forward from the prior year, which also saw energy outperform all other sectors.

YTD Outperformance of 38.31% relative to the S&P 500. Source: TradingView

Unusual Option Activity in XLE Through 2022

The institutions have been all over the energy trade all year long. During the first month of 2022, Market Rebellion recorded four back-to-back massive bullish option trades made by institutions in the energy sector.

Massive trades with massive payoffs to match.

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However, recently the sentiment has changed.

As event-driven traders begin to worry that a recession will cause demand for energy to dry-up…

Source: CNBC

…and technical traders begin to worry that about the newly-broken 2022 uptrend…

Some institutional traders have started to reposition in a big way.

Bearish unusual option activity following the price action in XLE all the way down — including more than 214,000 bearish put spreads bought in two back-to-back trades. Source: Market Rebellion.

Over the past month, Market Rebellion’s Unusual Option Activity service has recorded 10 colossal bearish trades in the XLE, beginning when the XLE was trading as high as $91.35 — meaning the institutions nearly called the exact top of the energy rally (XLE clocked in a 52 week high of $93.31).

Since the beginning of that bearish unusual option activity, the XLE has fallen more than 25% — far underperforming the S&P over the same time period.

The sudden bearish price action has led institutional traders who bet big on the downside to come out on top, yet again.

And a look at the most recent unusual option activity shows these bearish traders aren’t done yet. Market Rebellion continues to see big bearish betting to the downside as recently as twice just today.

The institutions aren’t always right, but they have access to research and insight that most individual traders aren’t privy to. Using their massive influence and reach, the institutions have a knack for staying a step ahead of the market, allowing these shadowy figures of finance to ride the biggest market trends up and down.