In mid October we expressed a bearish view in the industrial sector via a put spread in the industrial sector etf XLI. The etf almost immediately moved against us with the broader market but is now back to where we entered, here was the trade and rationale at the time:
Trade: XLI ($52.40) Buy Dec 52/48 put spread for $1
Rationale: GE is trading at highs for stock specific reasons, not improved fundamentals. We expect most industrial and transport stocks to continue to struggle and lead the rest of the market lower into year end. XLI options are relatively cheap, offering a way to define risk and play for continued technical deterioration.
With the etf at 52.75 this trade is worth about half of what we paid. It’s currently about -35 deltas which means in order to breakeven we’ll need at least a dollar lower in the near term (like today), and even more than a dollar lower for every trading day closer we get to next Friday (breakeven on expiration is 51, the break even mark to market approaches 51 exponentially each day)
What that means is we’re in a position where we need to defend this trade from becoming a total loss if the etf closes above 52 by next Friday. If we saw a little panic set in this afternoon we may get bailed out a little bit (implied vol is also helping today up 5 pts in Dec) and at that point may try to take the trade off for a smaller loss. If we don’t see that sort of move or a follow through on Monday morning we’ll be forced to maybe take our medicine and sell for a 50% loss on the position, which is disciplined with an out of the money trade like this that’s running out of time. If we saw this .75 bid int he next trading day or so we would likely tattoo that bid so to speak.