Patient Waiting Room – $XLV

by CC June 6, 2016 3:15 pm • Commentary• Trade Ideas

Less than a two weeks ago we expressed a bullish view for healthcare stocks to play a bit of catch up with the S&P 500 (SPX) as it approached its prior all time highs, choosing the Health Care Select etf, XLV given the disparate performance and concentration of its top 10 holdings:

If the top 5 breakout, and the next 5 play catch up, then the XLV could make a run to its prior 52 week high in the high $70s:

The trade was simple, merely a purchase of an at the money call:

*XLV ($71) Buy the July 71 call for $1.25

The etf was $71 at the time and it is now $72.75 and our call now has gains of about a dollar mark to market. We said originally that we’d like to spread the original call on a rally but we also are targeting the mid to high 70’s so we don’t want to be too aggressive on a call sale, especially with implied vol even lower now.  The break out above the downtrend from the 52 week highs could suggest the etf is establishing a new range with a re-test of the mid to high $70s in the offing:

From Bloomberg
From Bloomberg

So we’re going to continue to let the original call ride a little bit. If beaten up stocks, that are prominent 5 to 10 holdings like BIIB, CELG and GILD caught a bid soon, that could be just the thing to carry XLV back above 75. So we’ll keep an eye on it and not spread just yet. If we see any reversal soon we’d look to spread to protect current gains but as long as the trend remains higher we’ll try to be patient.