As Dan discussed earlier, U.S. stocks are are a fairly interesting spot, either back and filling a bit for a push to prior highs, or merely a series of lower highs that he believes to be a rolling top formation. If this is in fact a topping formation, and we see another failure at a lower high it might once again be confirmed with fairly steep drop to prior lows. However, U.S. stocks could be setting up for the mother of all short squeezes buoyed by the continued dovishness by the U.S. Fed which has been accompanied by a weak dollar and of course lows rates. We’ve tried to be patient in entering this market from the short side but it’s hard to time something like this and we’ve frankly been a little surprised at the strength the market has shown above 2025 in the SPX. Therefore we need to be careful with some of those sector shorts we have on. So let’s check in on some of our X’s. First, there was the XRT retail sector etf from March 10th:
*XRT ($44.65) Buy the June 45/38 put spread for $2
- Buy 1 June 45 put for $2.40
- Sell 1 June 38 put at 40 cents
The etf is slightly higher at 45.30 and the trade is worth about 1.25. Why such a big loss with the etf up only about 1.5%? The big reason is being slightly early in shorting meant that not only are the deltas against us here but so was volatility. On March 10th 30 day implied vol in XRT was about 22, today it’s only 18. So sideways action can hurt not just in decay but also if vol comes in. The good thing about this trade is June is a long way off and a lot can happen. The 45 strike is obviously in play as it’s at the money and so any reversal from here could quickly put this trade back in business. Of course, a continuation of low vol creeps higher means we have to be careful a keepa short leash to the upside of about 50% loss on premium.
The next trade to look at is the XLB Materials sector etf. Here was the trade, also from March 10th:
*XLB (43.45) Buy the June 43/38 put spread for 1.30
- Buy 1 June 43 put for 1.93
- Sell 1 June 38 put at .63
This etf is a dollar higher from our entry, making the trade itself now worth about .80. So this too suffered from the vol compression we’ve seen as well as deltas. Since this one is even farther out of the money with the 43 strike vs the stock currently at 44.50 we’ll need to keep a very tight leash here. And if the stock were to go down towards our strike it may make sense to roll the short put higher at that point to take off some premium risk.
The last X I wanted to look at is the XLE Energy sector etf. Here’s the trade from March 17th:
*XLE ($64.22) Buy April/June 60 Put Calendar for 1.40
- Sell to open 1 April 60 put at .55
- Buy to open 1 June 60 put for 1.95
With XLE lower at 61 this is a decent winner, worth about 1.85. The April puts at about .50 are less than what we sold them at with the stock a few dollars lower. What we’d like to do here is time the roll well and close those for less than we sold them as close to the 60 strike as possible. Since the long put strike is in June we have a few options of where to roll that short put to, either May or June, and we have the choice to stick with the 60 strike or go lower. Both of those decisions depend on where the stock is when we decide to roll. If the stock is near the 60 strike look for us to close the April puts and roll to a lower strike.
So that’s the plan on all three trades. We’ll update on the site if and when the time comes to adjust.