Trade Update XLK: Spreading Dec Calls, Lowering My Break-Even, Limiting Gains

by Dan November 19, 2012 12:58 pm • Commentary

Trade Update Nov 19th, 2012 at 12:53pm: While I was clearly targeting AAPL for a bounce with my Dec XLK call purchase last Thursday, I had kind of hoped it would get some help from large XLK components MSFT, IBM, QCOM & INTC, all of which massively under-perform the broad market today.  This is obviously a bit disappointing, and to quote a smart trader that I spoke with last week, “if you want to trade AAPL for the impending AAPL bounce then buy AAPL calls”.  Well he was obviously right, and we were playing AAPL through a couple of AAPL trades on the site, but I still like the set-up in the XLK and in some ways have this trade where I want it.  But I am gonna tweak a little bit, as I suggested in my original post that I would spread on a rally above $28.  


Action: XLK ($28.30) Sold to Open Dec 29 Calls at .20
New Position: XLK ($28.30 Long Dec 28/29 Call Spread for .29

My avg is a bit less than .29 as I averaged into the Dec 28 calls on Friday morning for those who follow us in Quick Hits:

Nov 16 2012, 10:05 AM

Dan: market feels like we may get a flush, i am looking to double down on my XLK dec 28 calls that I bought yesterday, if they are offered below .30 I will look to do so, this is a tad undisciplined but i like the odds of a dec bounce after nov flush

Nov 16 2012, 11:42 AM

Dan: I added to XLK dec 28 calls at .33


Original Post Nov 15th, 2012: New Trade XLK:  Tech So Bad It’s Starting to Look Good

XLK has been the sort of chicken way to play AAPL this year, as it has made up nearly 20% of the weighting of the Technology Select Spyder.  When you look at the concentration of the top 5 holdings, what becomes apparent is that this is a very levered way to play the 5 biggest tech companies in the world, as AAPL, MSFT, IBM, T, & GOOG make up nearly 50% of the etf’s weighting.  

The weakness is large cap tech shares since the Sept highs has not come as much of a surprise to us, we have been positioned for this from both fundamental and technical set up since the summer, but the dramatic change in sentiment and the subsequent stock weakness among once fortress stocks could present a near term trading opportunity.  AAPL is down 25% from its all time highs in Sept, clearly dampening investor enthusiasm in the space. In that same period, MSFT is down 15%, IBM is down 12.5%, T is down 13% and GOOG is down 16%.  While all had fairly disappointing results in the last few weeks, the recent weakness may be warranted as most of these stocks became very crowded trades, but my thought here is to play for a bounce based on near-term oversold conditions and fairly pessimistic sentiment.

TRADE: XLK ($27.70) Bought Dec 28 Calls for .49

Break-Even on Dec Expiration:

Profits above 28.49

Losses of up to .49 btwn 28 and 28.49 with max loss of .49 below 28.