Short term
Trade view / 13 June 2016 at 11:13 GMT

Looking for reversal in consumer discretionaries

Product Manager Futures and Options / Saxo Bank

We are initating this $2-wide bearish put vertical  in the consumer discretionary sector using the SPDR exchange-traded fund (XLY). The shares rallied with the rest of the market and appear to be heading down. 


Source: Saxo Bank. Create your own charts with SaxoTraderGO click here to learn more 

Among the sectors top holdings are Amazon (12%), Home Depot, Disney and so on. Shares of the Seattle-based company have surged 50% since making a low of $474 in February and should be a prime candidate for profit taking. 

Volatility is slightly higher (beta of 1.09) on the ETF than the overall market (S&P 500) and we expect bigger moves. Implied volatitility has been near 52-week low and any rise will benefit this vertical put spread.

With the underlying price closing on Friday at $78.49, this long put spread 79/77 would only require a small downturn to become profitable. Moreover we are within a hair from $78.25 ($79-$0.75) which is the breakeven point for the trade

Management and risk description

We are risking our initial investment of $0.75 to make $1.25, which is a good risk/reward outcome for a directional trade.

Being a defined risk strategy, you should allocate an amount you are comfortable losing. 

 Buy +1 XLY 15 JUL 16 79/77 put @ .77 (to open)

Buy +1 XLY 15 JUL 16 79 Put at $1.72   (mid between bid/ask)
Sell -1 XLY 15 JUL 16  77 Put at $0.97
Net Debit $0.75
Maximum gain (@exp) = $1.25
Maximum loss (@exp) = $0.75 
ROR= 166% 

Entry: Today, as two indvidual orders (BPO and SPO)

Stop: no stop 

Target: $77 or lower

Time horizon: 20-30 days

XLY 5-year chart:
XLY five-year chart
Source: SaxoTraderGO 

— Edited by Clare MacCarthy

Non-independent investment research disclaimer applies. Read more


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