Trade Update – Closing $XLU Oct Call Spread for a Gain

by CC October 5, 2015 2:33 pm • Commentary

A little less than a month ago we expressed a bullish view on Utilities stocks in the sector etf, the XLU. At the time XLU was close to support and we thought mis-priced given what markets were saying about the potential for interest rates over the next few months. Here was the original trade and some of our thoughts from that post:

Trade: XLU $41.40 Buy Oct 42/44 call spread for .50

-Buy to open 1 Oct 42 call for .60

-Sell to open 1 Oct 44 call at .1

As the FOMC nears their first rate increase in 9 years, it makes sense that high yielding defensive sectors might be sold off in advance, as Utilities have, but what’s curious to me is that the yield on the 10 year Treasury is nearly in the exact same spot as it was in late December, when the XLU was at its then all time highs.

So why would the XLU be trading at its 52 week lows if the Treasury Yields and Fed Funds futures don’t speak to a meaningful rise in interest rates any time soon? Just as I felt in late December that the rally in Utilities did not adequately reflect investors perceptions of the rate environment and related investment opportunities, I feel similarly now as the etf now approaches key technical support at $40, down 17% from the 52 week highs.

With XLU nearly 6% higher this trade is now worth three times what we paid. We’re going to book the profits and continue to look for similar plays from the long side like the XLP we traded on Friday.

ACTION – Sold to close the XLU ($43.95) October 42/44 call spread at 1.50