New Trade – $XLY: At Your Discretion

by Dan April 20, 2015 9:38 am • Commentary

On Friday after noon we outlined a trade idea in the Consumer Discretionary etf, XLY.  The idea was not to press the weakness, but wait for a bounce and then enter the trade.  With equities re-tracing a bit of Friday’s decline, we want to use the bounce to enter the trade.

Action: XLY ($75.80) Buy to Open May 75 put for 90 cents  to open

Break-Even on May Expiration:

Profits: below $74.10

Losses: between 74.10 and 75, lose up to .90, with max loss of .90 at 75 or higher, or about 1.2% of the underlying etf price.

See further detail below.


Original Post April 17th:  Name That Trade – $XLY: Consumer Reports

Expanding on the consumer discretionary theme from earlier (New Trade – $LULU: Downward Dog?), I think it warrants taking look at a sector etf that has been more resilient then teflon, the XLY.  All  you have to do is take a quick look at the top 10 holdings to see why:

from Bloomberg
from Bloomberg

Those top holdings make up almost half the weight of the index.

The thesis from the LULU trade earlier was simple, the U.S. consumer has been the single strongest economic force in the world for the better part of the last couple years.  But the recent weakness in employment data, retail sales, Empire manufacturing and Chinese exports, coupled with the 30% rise in crude oil, the U.S. consumer could be about ready to cool down its torrid pace of spending.

As far as I am concerned I have no interest in trying to short some of the stocks in the list above, heck the first two are likely to print $1 billion in sales in just 2 movies (Furious 7 for CMCSA and Avengers next month for DIS) but as a group they could be ready for a bit of a re-tracement to the low end of the 6 month range:

XLY 1yr chart from Bloomberg

XLY 1yr chart from Bloomberg

A look at the one year chart above shows the near term importance of technical support at $74, and what is likely a fairly healthy support level down at its 200 day moving average of $70.

Options prices look fairly attractive for a long premium, directional trade, as just recently starting to tick up:

XLY 1yr at the money IV from Bloomberg
XLY 1yr at the money IV from Bloomberg

As for entry, $70 is the range I want to target for a pullback.  But here is the thing, I hate to place a trade on an sector etf on a say its down 1.5%, in this case I think it makes sense to wait for an up opening, even the slightest bounce early next week before earnings really get underway and then enter the trade.  

Hypothetical Trade: XLY ($75.15) Buy to Open May 75 Puts for 1.25

Break-Even on May Expiration:

Profits: below 73.75

Losses: between 73.75 and 75, lose up to 1.25, with max loss of 1.25 at 75 or higher, or about 1.5% of the underlying etf price.

Rationale:  If the stock were to break below 75 I would look to spread the 75 puts selling a lower strike put, possibly the 70 strike, locking in some short term gains and reducing the break-even of the trade.

The etf is down with the market today and I don’t want to press here.