Trade Update $XLY: Closing Nov Put Spread for Nearly a Double

by Dan November 9, 2012 9:54 am • Commentary

Trade Update Nov 9th, 2012: Consumer discretionary as a sector has many headwinds in my humble opinion, but the the XLY has been a bit more stubborn than I would have expected over the last month.  I am going to take profits in my Nov Put Spread that just recently came into the money and look for a better entry point to roll this bearish view out a bit possibly to Jan.  

Action: Sold to Close XLY ($45.30 ) Nov 46/ 44 Put Spread at .75 for a .35 profit.


Original Post Oct 2nd, 2012: New Trade XLY: Getting Short the Bling, With Defined Risk

Readers of our site should be very familiar with our belief that we do not subscribe to the notion that the Fed’s latest round of quantitative easing, focused on MBS will magically trickle down to consumers in the form of increased confidence due to their rising values of stocks and real estate.  Regardless of the Fed’s intention to QE risk assets higher, consumers the world over appear strapped, primarily in China (as evidenced just recently by NKE’s futures orders) and Europe (as evidenced by Burberry’s weak results and guidance early last month).  

We are not economists here, but the whole trickle down theory seems so 80’s to us, and if history shows, it really just helps a small group of individuals and institutions that own risk assets.  At this point, from where we sit, consumer de-leveraging has been aided by record low interest rates, that appear will stay that way for some time, but the West may be at a very different stage of this process from other regions.  The U.S. multinationals that have built up operations in the developed world over the past 3 decades might be hitting a permanent rough patch as a result.  We may very well be at the early stages of this process, and it very well may be that recent earnings/growth disappointments from the likes of NKE, COH, Burberry, MCD, CMG, PCLN, SBUX may be at the start of a trend rather than the end of one.  We want to focus on the Consumer Discretionary Spyder ETF, we want to short  the global consumer, and want to start with the crap that they just don’t need!  The ETF has had a massive ytd to run outperforming the SPX and the Nasdaq, while many of it’s components face what we see as a multitude of headwinds.

Technicals:  XLY is coming off bull-market highs set on the QE3 rally a couple weeks ago.  Its bull market uptrend has remained in tact for more than 3 years, and important support comes in around the 43-44 level:


Vol:  XLY 30-day implied volatility has declined to the lowest levels of the entire bull market.  30-day realized volatility has also declined to near its lowest levels, and XLY is near new bull market highs.  Options traders are clearly unwilling to hold premium until XLY demonstrates more close-to-close volatility than has been the case, as the recent decline in XLY spot price has been on low volatility as well.

Chart of 30 day implied (red line) vs. 30 day realized (gray line), and ignore the 2 large spikes, those are data errors in Livevol:
TRADE: XLY ($46.85) Bought Nov 46/44 Put Spread for .40

-Bought 1 Nov 46 Put for .70

-Sold 1 Nov 44 Put at .30

Break-Even on Nov Expiration:

-Profits btwn 45.60 and 44, make up to 1.60, max profit of 1.60 at 44 or lower (down ~6%)

-Losses of up to .40 btwn 45.60 and 46, max loss of .40 at 46 or higher.


TRADE RATIONALE:  It is our strong belief that despite central bank action the world over, and the possibility of further easing/stimulus in China, that earnings (yes backward looking), and guidance will matter, and the ability for further equity strength through year end could lie in the earnings visibility of U.S. multi-nationals, particularly those exposed to the global consumer and rely on growth outside of the U.S.