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Carter Worth And Mike Khouw's XLE Trade

On CNBC's "Options Action," Carter Worth analyzed Energy Select Sector SPDR (NYSE: XLE) from a technical point of view.

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On CNBC's "Options Action," Carter Worth analyzed Energy Select Sector SPDR (NYSE:XLE) from a technical point of view. He is concerned that the stock might trade lower because crude oil has continued to recover while XLE has not.

Worth explained his bearish view with a slide that shows that the 3-month rolling spread between crude oil and the ETF was greater than 35% only 13 times in the past. The energy stocks rarely underperform crude oil and they usually trade lower when it happens. They have recorded an average loss of 0.4% a month after these 13 occurrences. The loss increased to 3.4% after 3 months, to 5.6% after 6 months and to 6.5% in a year. Worth also noticed a bearish wedge on XLE's chart and he thinks the stock is breaking out on the downside.

Mike Khouw suggested a bearish options strategy to take advantage of a potential move lower. He wants to buy the October $35/$30 put spread for a total cost of $1.25. The trade breaks even at $33.75 or around 7.5% below the current stock price. If the stock drops to $30 or lower, the trade is going to reach its maximal profit of $3.75.