Gone Fishing… And a couple for the road XHB, XLP

by Dan August 25, 2017 3:47 pm • Trade Ideas

CC and I are both going to be off the trading grid next week while we will each be traveling with our families and will not be posting. We hope that you enjoy the final week of summer, we plan on getting recharged for what will surely be a hectic September and October given the uncertainty regarding the budget and debt ceiling.

On tonight’s Options Action on CNBC I will offer two trade ideas on sector etf’s that we have looked at in the last few weeks. Earlier this week we offered some thoughts on Homebuilding stocks (XHB – Leaky Foundation). And on August 7th we looked at consumer staples stocks, specifically at the XLP, the etf that tracks the group (The Dollar, China and US Staples). In both instances, we leaned to the short side and offered defined risk trade ideas to express the views, but in both instances we looked to sell short dated puts to finance longer dated ones. On tonight’s show I will detail vertical put spreads in each.

Here are the trade ideas, the theses detailed in the prior post still stands, these are just more directional ideas.

Trade Idea: XHB $37.50 Buy Oct 37/ 36 put spread for 25 cents

-Buy 1 Oct 37 put for 65 cents
-Sell 1 Oct 36 put at 40 cents

Break-Even on Oct expiration:

Profits: up to 75 cents between 36.75 and 36, max gain of 75 cents at 36 or lower

Losses: up to 25 cents between 36.75 and 37 with max loss of 25 cents above 37

As I stated in the prior post, a pull back in this name might not be severe, but I like targeting the February breakout near $36, this trade idea offers a favorable risk reward over the next 8 weeks.


Trade Idea: XLP $54.75 Buy Jan 55 / 50 put spread for 1.30

-Buy 1 Jan 55 put for 1.80
-Sell 1 Jan 50 put at 50 cents

Break-Even on Jan expiration:

Profits: up to 3.70 between 53.70 and 50 with max gain of 3.70 or near 3x premium at risk at 50 or lower, down about 10%

Losses: up to 1.30 between 53.70 and 55 with max loss of 1.30 at 55 or higher, or 2.4% if the etf price.

Aside from high valuations of components in an already expensive market, I expect Amazon’s announcement to lower prices on groceries at their newly acquired Whole Foods unit will weigh on consumer products companies margins and that of competitors like Walmart and Costco which are both components of the XLP. Oh and this chart looks nasty, textbook head and shoulders top: