With Oil And Gas Earnings On Deck, A Trading Opportunity In Leveraged ETFs

Oil is proving to be a vexing investment this year. The battle of production wills between the Organization of Petroleum Exporting Countries (OPEC) and U.S. shale producers is hampering crude prices, and is one of the reasons why the energy sector is one of the worst-performing groups in the S&P 500 year-to-date. 

After trading in a tight $4 range for three months, crude oil futures have shown a little more volatility these last two months. For aggressive risk-tolerant traders who want to tap into energy sector volatility, there's an array of leveraged exchange traded funds that can deliver outsized returns. Two of the more notable ideas are the Direxion Daily S&P Oil & Gas Exploration & Production Bull Shares GUSH and the Direxion Daily S&P Oil & Gas Exploration & Production Bear Shares DRIP.

GUSH attempts to deliver three times the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP looks to deliver triple the daily inverse performance of that widely followed energy benchmark.

GUSH's underlying index includes domestic companies from the oil and gas exploration and production sub-industry. As of September 30, 2016, the Index was comprised of 60 stocks concentrated in the energy and oil and gas sectors, according to Direxion, with a median market capitalization of $5.18 billion. 

Top weightings in the fund include Rice Energy Inc RICE, Callon Petroleum Company CPE and Chesapeake Utilities Corporation CPK, all of whom have weightings above 2 percent and report earnings next week.

GUSH and DRIP “have become popular among hedgers and speculative traders whom are likely looking to capitalize on the gyrations and volatility in this segment which is often led by Crude Oil price volatility itself," said Street One Financial Vice President Paul Weisbruch in a note out Monday. "One can look no further than a recent chart of Crude Oil futures prices and see more than a 10 percent rally in the commodity just since late March."

Direxion, one of the largest issuers of inverse and leveraged ETFs, launched DRIP and GUSH almost two years ago. 

DRIP and GUSH could be particularly useful for active traders amid heightened tensions in the Middle East and other geopolitical hot spots.

“With increased tensions overseas on the heels of the Syrian crisis and no end in sight to the war with ISIS, it seems this volatility is here to stay for now and this should maintain a healthy appetite in the marketplace for GUSH, and DRIP,” said Weisbruch.

There's also an opportunity in the Direxion Daily Natural Gas Related Bull 3X Shares GASL and its counterpart, the Direxion Daily Natural Gas Related Bear 3X Shares GASX. GASL aims to deliver 300 percent the return of the ISE-Revere Natural Gas Index, which is designed to take advantage of both event-driven news and long term trends in the natural gas industry, while GASX aims to deliver -300 percent the return.

Devon Energy Corp DVN, Anadarko Petroleum Corporation APC Concho Resources Inc CXO Cabot Oil & Gas Corporation COG, Chesapeake, Noble Energy, Inc. NBL, and Encana Corp (USA) ECA are the top holdings in the funds. Together they account for nearly 40 percent of the fund's weighting. 

Traders looking to make a play here should watch how these companies react to earnings. With the exception of Cabot Oil & Gas, which reports on Friday, all those companies mentioend are due to report in the first half of next week. 

It should be noted that these funds are best used as short-term trades, and are only for people who understand leverage.