Back on April 12th we took a look at the ongoing pressure on retail sector stocks, specifically the Retail etf XRT. At the time XRT had just bounced off of its lows for 2017, but we felt it was likely to be short-lived with new lows possible in the coming months. Here’s what we said at the time, a trade and its rationale, from April 12th:
While expectations are low for most, the stakes are getting higher by the day, which is why we might see one of the S&P’s weakest sectors finally have a bit of bloodletting.
So what’s the Trade? Ideally, I would like to trade a put calendar, selling a shorted downside put to buy a longer dated one, but with implied vol so low, short-dated out of the money puts are too dollar cheap to sell and at the money puts a few months out too cheap not to own. Which leads me to a slightly more complicated trade, a diagonal calendar:
Buy XRT ($42.10) April 28th weekly 40.5 / June 42 calendar put spread for $1.20
- Sell to open 1 April 28th 40.50 put at 20 cents
- Buy to open 1 June 42 put for 1.40
After we put on the trade XRT move a little bit higher and we had this update on April 28th:
There’s two options here. One is to simply roll the short put, establishing a vertical in June like the 42/40 but at this price point it wouldn’t leave you with a great risk reward (although it would reduce premium risk). The second is to let the XRT trade a little bit lower before re-establishing the short leg of the trade. I think that’s wise as the ETF failed at the 200 day moving average and looks poised to re-test the 50 day
XRT did, in fact, test the 50 day and failed, and is now testing the $40 level, with a large air pocket below. With XRT 39.60 the trade (now just the June 42 puts) is worth 2.30 mark to market vs the original 1.20 cost. That’s a nice profit and for those happy with that there’s no reason not to take the money and move on.
But for those with a longer-term bearish view, with expiration today these puts are basically just short stock. So for those looking to extend this view out and target a move lower now that the index may be breaking down technically (with the next stop 37.80), but keep a defined risk profile, here’s how to do that:
ACTION -Sell to close the XRT (39.60) June 42 puts at 2.30 (for a 1.10 profit)
Buy to open the XRT (39.70) July30th 39.50/37.50 put spread for .60 (.50 credit on the roll)
- Buy 1 July30th 39.50 put for .90
- Sell 1 July30th 37.50 put at .30
Breakeven on July 30th – This breaks even at 38.90 and can make an additional 1.40 ontop of the current profits.
Rationale – This is essentially a put spread for a .50 credit after the roll, taking in 1.10 from the original trade, booking .50 of that in profits, and spending .60 of it for more bearish opportunity out until the end of July.