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 $ 1  Two 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 East  Trends of US Oil Production

 Today’s Close:  52 Week Range: –  Beta: 1.1  Dividend/Yield: 0.33/1.71  Average 3 mo Volume: 10.9 M

Strengths  Alternative fuels are still not developed enough to overtake oil  Natural gas is seen as a cleaner intermediate  Progress in technology Weaknesses  POTUS agenda for renewables  Lawsuits for spills and leaks create fear and aversion  North American market’s showed weak 3Q Opportunities  Basins that have yet to be fully drilled  Oversea markets have seen a good 3Q increase Threats  POTUS regulations on oil drilling and fields  Eurozone Recession  Fiscal Cliff

 Buy XLE 72 Call for 16 Mar 2013  Energy has been beaten down the past few months  Lock 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 – (with a.43 delta)