Explore Your Options  |  MAY 2008

Explore Your Options by Tom Gentile

Explore Your Options by Tom Gentile CRUDE AWAKENING Crude oil keeps moving to record highs, but I don’t think it can stay above $100 a barrel for much longer. However, I don’t trade commodities or futures. Do I have any other options if I think crude is going to fall during the second half of the year? If you don’t want to trade futures, you can play crude oil in a few different ways — directly and indirectly through your brokerage account. Indirectly, you can often profit from moves in oil through options on energy-related companies like Exxon Mobil (XOM) or Halliburton (HAL). Since the profits of oil and oil drilling companies are related to the price of oil (the higher the better), their stock prices are sensitive to changes in the oil markets. If you expect oil to see a dramatic decline, you might short shares of oil companies or create bearish trades using options. You can also trade indexes and exchange traded funds (ETFs) that track baskets of energy-related stocks. The Oil Service HOLDRS (OIH), for example, is a fund that tracks the performance of Halliburton and 15 other oil drillers. The OIH is very liquid and the puts and calls are also actively traded. Shares can be bought or sold short. Meanwhile, the options allow investors to play industry trends. The PHLX Oil Service Index ($OSX) and the AMEX Oil Index ($XOI) are examples of indexes that have listed options and can be used to play the next move in crude oil. These indexes also track groups or baskets of major oil companies. However, unlike the Oil Service HOLDRS, the OSX and XOI don’t have listed shares and, as a result, can’t be bought or sold. The only way to trade them is with options.

by Tom Gentile