Sold XLB Naked Put

I placed a limit order for an XLB (Materials Select Sector SPDR ETF) naked put one week ago when XLB was trading at $62.92, but XLB was still coming off lows from a week earlier at that point and the VIX was 3-4 points lower than today. So, when XLB climbed to $64.17, I figured my order wasn’t going to hit. However, things can change quickly. The bulls threw a little fit yesterday afternoon and this morning to knock stocks lower and push the VIX higher.

While XLB was trading at $63.03, I sold one XLB March $63 naked put for $1.35 and received $134.32 after paying $0.68 in commission. My thought process around XLB is that with the tax cuts in place and possibly more infrastructure stimulus on its way, the materials sector should continue to do well or at least not falter much. Since I sold the put at the money, I only have a 2.18% cushion. On the upside, I have a potential gain of 2.18%, 16.66% annualized.

XLB has been on a steady run higher since early November 2016, like most stocks and equity ETFs, which means it could be susceptible to a reversal beyond the 1-2% we’ve saw through 2017. XLB closed below its 10 and 20-day moving averages today, which is definitely a bearish indicator, but I think the 50-day moving average is more important based on how the past six months have behaved. The 50-day moving average is at $60.82 today and has a fairly steep trajectory. While XLB could fall below my cost per share of $61.66 if the put is assigned, I don’t think it’ll fall much further if the 50-day moving average can act as support again. Just above the 50-day moving average is the trend line of higher lows that began on November 15. The trend line and moving average should converge soon, offering another layer of support. This projection is how I chose this strike. I’m fairly confident it’ll hold support and my option will only be at a paper loss for a brief stint.

If my first lines of defense don’t hold, the 100-day moving average has a better history of support. It hasn’t come into play since August 21, 2017, when it acted as support for the fourth time in less than two weeks. At $59.21 right now, the 100-day moving average is more than 7.5% below the intraday high from the past two trading days. A decline of that much along with a possible longer trend line of higher lows converging with the 100-day moving average has a high probability of bringing the bulls back into play unless some other macroeconomic factor comes into play. If I take an assignment while XLB is around $60 (assuming XLB doesn’t fall more quickly than I think it will), I’ll only have a paper loss of $166 and will consider doubling my trade at a lower strike to help dollar cost average down some before I ride it higher when the bears take a break.

This trade pulls me to fully invested, but I have my NFLX naked put that’s far out of the money still at the $205 strike. I might close it if I can find something I want to replace it with, but if not, I might as well save the $43 I’d have to spend to close an option that’s almost $74 out of the money.

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