Yesterday (read here) we updated a bullish trade idea in the S&P Energy Select etf, the XLE as it approached the downtrend that has been in place from its post election 52-week highs:
For those technicians out there, who like to connect the dots, that early August high, coupled with today’s failure leads this chart(our)ist to consider a short entry. What would be my downside target you ask? Well that’s easy… the convergence of the 2015 low / early 2016 breakdown level and the downtrend from the late 2016 highs near $60:
Some of you might recognize the “triangle of death” formation.
Short dated options prices are cheap as chips with 30 day at the money implied volatility at 14%, a tick above the 52 week lows making long premium directional trades look attractive:
Trade Idea: Buy XLE ($64.50) Oct 64 / 60 Put Spread for $1
-Buy 1 Oct 64 puts for 1.40
-Sell 1 Oct 60 puts at 40 cents
Break-even on Oct expiration:
Profits: up to 3 between 63 and 60 with max gain of 3 at 60 or lower
Losses: up to 1 between 63 and 64 with max loss of 1 at 64 or higher
Rationale: risking 1 to possibly make up to 3 if the XLE were to retest technical support near $60 down about 7% in the next six weeks after it has rallied about 5% since making new 52 week lows late last month.