Trade Update – $XLI: Closing Dec Put Spread for a Loss

by CC December 14, 2015 12:29 pm • Commentary

In mid October we expressed a bearish view in the industrial sector via a put spread in the industrial sector etf XLI. The trade has been a loser for us but with the broader market weakness, the etf has come back towards our long put strike. Here was the original 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.

We updated our thoughts on Friday here:

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.

The trade is now .60 bid and we don’t want to be too greedy here as we have other short delta trades positioned better for a possible follow through in broader market selling this week. We gave it a shot this morning to see if we could at least get back to even but the market found footing and time isn’t on our side the rest of the week:

ACTION – Sold to close the XLI ($52.50) Dec 52/48 put spread at .60 for a .40 loss