On Options Action this evening, Carter Braxton Worth, aka "The Chartmaster" and I discussed the sharp selloff in energy stocks we've witnessed over the past couple weeks, and provided an example of an options trade on the energy ETF $XOP (which I own). Tony mentioned shortly after we outlined a call spread risk-reversal that he had initiated a similar trade in oil service company Halliburton earlier today (a stock I also own). When we think of the oil and gas business it's generally broken down into three categories. Upstream, which is generally thought of as exploration and production, or "E&P". Companies in E&P include another company I've spoken about recently, Antero Resources Corp, other names you may recognize include Devon Energy, EOG, Pioneer and Range Resources. Of course there are many others. These are capital-intensive businesses, sometimes large investments are made that either turn out to be less productive than hoped, or those investments are made at a time when oil and gas prices are high, only to turn lower by the time they are productive. These companies will sometimes try to hedge those risks where possible, but when things are good for the E&P companies they can be very good indeed. Although this group has fallen sharply, I believe many of these companies may be looking at several good years ahead.
