Back on March 6th we checked in on the homebuilders via the XHB etf after a fairly sharp selloff in those stocks in late Jan through February. We saw the potential for the bounce to hold but knowing full well that any bullish positioning was somewhat contrarian, looked to reduce risk to as little as possible through the use of a call calendar. Here was the original trade idea:
XHB (41.15) Buy the March29th / June15th 42 call calendar for 1.00
- Sell 1 March29th 42 call at .40
- Buy 1 June15th 42 call for 1.40
Since that post, XHB has bounced about a bit and got as low as 39 on the recent broader market sell-off. It’s in the midst of another bounce with no all-clear signaled yet in itself or the broader market. Its recent high took it up to the 42 level the original calendar targeted:
So now with the short March 29 call expired we can look to further reduce premium. With the etf 41 today the trade (which is now simply the June15th 42 call) is worth about 1.05. Clearly, the calendar has done its job as the stock is slightly lower yet the trade is slightly profitable. That gives us an opportunity to make a slight adjustment and continue this view for less.
Update – Sell to open the XHB ($41) April 42 calls at .20
New position – Long the April/June 42 call calendar for .80 (currently worth .85)
Breakeven on April 20th – This trade does best if XHB gets back to its recent high of 42. If it goes sideways or lower this re-initiation of the calendar will help somewhat and the overall risk is now .80 rather than the original 1.00.
Rationale – Ideally the April calls expire worthless (expiration is fast approaching) and the spike in near-term volatility gives us an opportunity to take advantage and get .20 on a call sale. If the April calls do expire worthless the position can then be turned into a June Call spread, further reducing risk and positioning for a more aggressive upward move into the Summer if the market jitters cease.