11-3-26: Using Energy Options to Take “Implied Market Volatility” to the Bank

by Bryan Perry

November 3, 2026

Market and sector volatility can either cause elevated stress or seriously beneficial income to one’s portfolio. Over the course of the past six months, the majority of the S&P’s 11 sectors have endured fairly extreme levels of volatility. This past week, the technology sector was the poster child of what is termed “excessive implied volatility,” which (translated) means share price deterioration – but not always.

This “implied volatility” is the options market’s term for a forward-looking estimate of how wildly an underlying asset’s price will fluctuate over a specific time period. Rather than tracking historical price movement, implied volatility is backed out of current option market prices using mathematical formulas like the Black-Scholes model. In plain terms, it measures aggregate uncertainty. For instance, when traders expect impending catalysts, earnings surprises or macro turmoil, they will bid up option contracts as portfolio insurance, driving implied volatility and option premiums higher.

In markets navigating a volatile streak, taking full advantage of implied volatility means selling option premiums back to the marketplace and capturing outsized option premium-related income. For covered-call strategies, implied volatility acts as the primary revenue engine. When a fund sells call options against the shares it owns, the cash premium it pockets rises proportionally with the implied volatility.

In lower-volatility environments, option selling produces modest single-digit yields that rarely compensate for capping upside gains, while elevated implied volatility inflates the option seller’s premium income, allowing covered-call ETFs to distribute sustainable double-digit annualized yields.

The current market environment represents a structural “sweet spot” for covered-call income ETFs: Broad indices are characterized by rich equity valuations and range-bound, sideways friction rather than big bull rallies, while ongoing macro and geopolitical crosscurrents keep implied volatility persistently elevated. Because standard equity dividend yields remain near historical lows, investors face an income drought.

In a choppy market, pure equities generate sluggish capital gains but covered-call funds capture fat up-front option premiums that outperform static buy-and-hold strategies without suffering from the capped-upside drag that occurs during parabolic market melt-ups.

Applying this methodology works best in a sector that is technically overbought. The energy sector fits this profile and strategy to a tee. Be it the integrated major oil companies or the exploration and production companies, the top holdings in the State Street Energy Select Sector SPDR ETF (XLE) account for 78% of total assets. Shares of XLE have rallied 55% over the past three-months.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

With WTI crude trading at around $104 a barrel as of last Friday, the following chart shows that WTI is at the high end of its long-term historic range, with option premiums having expanded meaningfully in the last few months. Hence, it stands to reason that staying long the sector while banking historic call premium makes good portfolio sense, whether done individually or with ETFs or closed-end funds.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Applying this strategy to other sectors that have rallied due to defensive characteristics but lacking in fundamentals (i.e., consumer staples, REITs, utilities) requires more technical confirmation. Increased input costs, higher financing thresholds, and regulatory hurdles are headwinds to these three sectors that saw sharply bullish market rotation as funds flowed out of portfolios overweighted in technology.

Chasing these sectors following a knee-jerk spike invites fresh risk, whereas staying long leading energy producers and refiners, where global supply levels are low and visibility of all-out future production, is about as bright as can be makes for a core sector holding and terrific inflation hedge.

By the end of September, global oil inventories remained substantially below pre-war levels, while onshore stocks had fallen to their lowest levels since at least 2016. The continued depletion of these reserves is reducing the market’s ability to absorb additional supply disruptions. Without a rapid resolution to the ongoing conflicts in the Middle East, global oil markets could face further turbulence in the coming months, particularly as available inventory buffers continue to shrink. Despite improved crude flows through the Strait of Hormuz, supply risks remain elevated and shipping costs continue to weigh on the market. As of this week, the conflict with Iran and its proxy states looks to extend out indefinitely.

Selling individual call options on the integrated oil companies, the oil tanker shipping companies, the refiners, and oil service companies can provide some of the most attractive income the option market is offering during these highly charged geopolitical times. So, why not consider cashing in on this volatility and strike while the option iron is hot. At some point, volatility will retreat and so will lofty yields.

For income investors seeking to capture rich call option premiums in a simple plug-and-play investment, the State Street Energy Select Sector SPDR Premium Income ETF (XLEI) is worth consideration. The strategy is to buy shares of State Street Energy Select Sector SPDR ETF (XLE) and sell just out of the money monthly calls. Below is a table of the past 12-months’ distributions, with rolling yields over 17%.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

There are other sectors with covered call strategies that also offer outsized yields where investors need to perform their due diligence. But when option income funds related to energy are paying out huge yields during periods of extreme volatility where the underlying fundamentals look to extend out for several months if not quarters, then doing some homework on whether to commit capital is indeed warranted.