Back on June 6th we legged into a bit of a pairs trade by selling a put spread in XLU and buying a put spread in XLE. Here’s how those trades looked:
1:02 PM EDT – JUNE 6, 2013 BY DAN
Trade: XLU ($37.28 ) Sold the June 38/36 Put Spread at 1.00
- Sold 1 June 38 Put at 1.20
- Bought 1 June 36 Put for .20
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9:53 AM EDT – JUNE 6, 2013 BY DAN
Trade: XLE ($79.85 ) Bought the June 80/77 Put Spread for 1.00
- Bought 1 XLE June 8o Put for 1.60
- Sold 1 XLE June 77 Put at .60
With expiration today, these trades are trading almost exact to eachother from an intrinsic value perspective. In other words, iff expiration was this minute both would close at about 1.60.
Since we have the rest of the day the question is what to do now. Do we close the trade now for basically a push? Or do we take the chance that XLU has a slightly better day than XLE and we get a small winner?
The key point here is the fact that XLE is a 3 dollar wide spread that we’re long and the XLU is a 2 dollar wide. What that means is that if the market got weaker into the close, the XLE has the potential to make us $2 (max $3, paid $1) while the XLU can only cost us $1 (max $2, sold at $1)
Because of this, we’re gonna hang onto to the pairs trade for as long as possible into the close. This doesn’t risk much as if the market stays where it is or rallies, the trades are likely to be near eachother as far as closing value. But, if the market tanks again, it’s very possible that one closes closer to 2 while the other closes closer to 3.