It’s time to update the XLB trade once again.
To summarize, we are in this trade because the charts tell us that is where we should be. Here at Deep Pocket Options, we like to use ETF’s for many reasons: They are made up of a basket of stocks in one “sector”, and sectors tend to trend very strongly over extended time frames, we don’t have the risk of owning single companies (ANY company can have news that causes violent moves in the stock’s price), the SPDR ETF’s are very heavily traded along with their options in volume, etc. We have discussed the reasons in previous blog posts so if you are interested, please look them up.
As I wrote last week, the spike in the XLU would be temporary, and it was. We saw XLU briefly at the top of the Relative Strength list that we follow, but it has now moved down to #4, and may fall further. We have discussed this previously, so check those older blog posts. XLU is a special case that you must understand.
We want to focus on XLB, the Materials SPDR, which has returned to #1 on our Relative Strength table. This strength has been in place for some time, and we expect it to continue. We have been trading the XLB since April 10, so let’s review.
The position has now profited $444, if we were to close it all immediately. Our goal is not to make short term profits, but to set up positions that generate income over long periods.We have no intention of closing it, but the market might have thought otherwise. Most of the position expired on Friday, so we are currently short only 2 May 46 puts for a small DIA-Weighted Delta, and a daily income of about $3. As it turned out, the expiring positions did end up closing most of our short contracts so a lot of that $444 is booked profit. On Monday, we will start to rebuild the position and try to do the same thing for another expiration.
9 days, about $50 a day, and we never did own a single share of XLB. That’s a really good return, perhaps a little better that we usually expect. But, the thesis remains intact and XLB remains strong, so our simple Mission Statement is: Sell puts on down days and wait patiently for the profits.
How did we do it? On April 10 we sold three 47 puts at an average price of 51 cents. We sold another contract on the 11th and some more on the 15th, but let’s slow down and look at the April 10 trade first. We took in about $150 on the 10th as we sold the puts expiring 7 days out. We did not know how this position would resolve itself, but we entered the trade prepared to respond as the price of XLB moved around, thus changing the price of our short options.
As it turned out, these options expired out of the money and we did not have to take any further action. The entire $150 was profit – those contracts no longer exist – and we kept all the money. Yes, sometimes it really is that simple to make money trading options.
Stay Optioned, My Friend!