Recommendation: Buy Call Options in XLE

What are options? Right, not obligation, to buy or sell an asset

at a certain price before a certain date Option premium 1 contract = 100 shares Delta

Types of options Call – Right to buy Put – Right to sell

You own Stock A at $50 a share Your sentiment: bearish

Sell 55 Call for $ 1 Two results:

Price eclipses 55 (ex. 60)▪ You have to sell at 55▪ So you make capital gain in stock plus the option

premium Price doesn’t pass 55 (ex. 45)▪ You don’t have to sell▪ So you make the option premium, hedging the loss

Stock A is at $50 a share Your sentiment: bullish

Sell 55 Put for $ 1 Two results:

Price eclipses 55 (ex. 60)▪ Nothing happens▪ You make the option premium

Price doesn’t pass 55 (ex. 45)▪ You have the obligation to buy at 55▪ Even though it is trading at 45, you have to buy at

55

Stock A is at $50 a share Your sentiment: bullish

Buy 55 Call for $ 1Two results:

Price eclipses 55 (ex. 60)▪ You have the option to buy the stock at 55

Price doesn’t pass 55 (ex. 45)▪ You don’t have to do anything▪ You only lose the option premium

You own Stock A is at $50 a share Your sentiment: bearish

Buy 45 Put for $ 1 Two results:

Price eclipses 45 (ex. 60)▪ You don’t have to do anything▪ You only lose the option premium

Price doesn’t pass 45 (ex. 40)▪ You have the right to sell the stock at 45▪ Protection from downside

ETF with companies from oil, gas and consumable fuels, and energy equipment and services

Corresponds to the price and yield performance of its holdings Ex. XOM, CVX, SLB, OXY, APC, HAL, BTU

Israel/Gaza conflict Middle eastern conflicts affect oil prices

IEA reported that US can pass Saudi Arabia in oil production within 10 years Previous report had Saudi holding until

2035 Low gasoline and oil prices

Near 18 month lows Recent Gulf oil rig fire

Hurricane Sandy and seasonal increase Shut down oil refineries, decreased demand from

businesses/consumers, crude/nat. gas prices down

Fiscal Cliff Threat of second recession decreasing demand

Eurozone Recession Eurozone 3Q GDP falls 0.1% (tightened 0.2% in

2Q) Unemployment reaches record high of 11.6% Growing economies increase energy demands

Coal has risen for the past 10 years, but EIA predicts a decrease in the near future

Natural gas has been fluctuating but overall trend is up

Energy sector has been beaten down Nearing lows of the past 18 months

Increasing conflict in Middle EastTrends of US Oil Production

Today’s Close: 70.9152 Week Range: 61.11 – 77.35Beta: 1.1Dividend/Yield: 0.33/1.71Average 3 mo Volume: 10.9 M

StrengthsAlternative fuels are still not developed enough to overtake oilNatural gas is seen as a cleaner intermediateProgress in technology

WeaknessesPOTUS agenda for renewablesLawsuits for spills and leaks create fear and aversionNorth American market’s showed weak 3Q

OpportunitiesBasins that have yet to be fully drilledOversea markets have seen a good 3Q increase

ThreatsPOTUS regulations on oil drilling and fieldsEurozone RecessionFiscal Cliff

Buy XLE 72 Call for 16 Mar 2013Energy has been beaten down the

past few monthsLock in a moderate gain, with low

risk

Sector: Energy Industry Group: Energy and utilities Current Holdings: PXJ, FEN, VPU, AMLP,

OXY, HAL Target (Current) Allocation: 7.23% (8.96%) Recommendation:

Buy 5 XLE 72 Call options for 16 March 2013 at $2.70▪ Cost: $1350 (plus commission)

Sell calls after a 25-30% increase▪ XLE increase to 72.38 – 72.67 (with a .43 delta)