Almost two and a half months ago, I mentioned that I was considering a bullish spread on XLF, the Financial Select Sector Spider. It was trading around $22.00 that day. Before I placed an order over the next week, it started to falter and fell more than $1.50 from its high. I stopped following it as closely during that slide and missed the turn-around. This past weekend, Steve Sears had an article in Barron’s on the bullish case for XFL, but I didn’t react quickly enough. I thought it might catch a little bounce on the article and then calm down some. I’m not saying he moved the market, but I’m sure the article didn’t hurt. He does get credit for calling the bottom for the recent dip.
XLF hasn’t reversed course all week and after closing last Friday at $21.87, it opened on Monday at $21.98 and hit a high of $22.64 today. I hesitated to jump in after seeing it gain ground all week, but opted to take a small position this afternoon. While XLF was trading at $22.47, I sold three XLF June $23 naked puts for $1.00 each and received $298.79 after paying $1.21 in commission. I thought about placing the order for $1.01 so I could receive a full $300 after paying commission, but those are the silly moves that can cause me to miss a trade. For a couple of hours, I had the high trade of the day for this contract, so I’m content with my trade. Before the end of the day, I saw the bid/ask at $1.02/1.04, and then I stopped looking.
I sold the contracts in-the-money based on the belief that financials have more upside left in them this spring and I wanted to push for a better return than I would’ve received from going out-of-the-money. I’m sure I could’ve worked a better trade on Monday at the $22 strike if I had moved quicker. Right now, XLF is sitting in the bad spot of being half way between the closest strikes with ~2% in either direction. I like the $23 June strike because I can still profit if XLF reverses a little or stays flat. If I wasn’t selling in-the-money, I think I would have sold more contracts. However, this works out nicely because I don’t have as much at risk if XLF tanks and can still make a worthwhile percentage and dollar return if XLF pushes another 2+% higher. I looked back to see the last time I traded XLF and found this is my first XLF trade ever. I was surprised.
XLF Naked Put Risk/Reward Breakdown
- Potential profit: $298.79
- Potential return: 4.53%, 17.97% annualized
- Breakeven price: $22.00
- Downside protection: 2.07%
- Recent high: $22.65, hit it today
- Cushion from recent high: 2.85%
- Expected support: $22.00+-, followed by $21.80 (the 50-day moving average could come into play here) and then $20.80 when the ascending 200-day moving average comes into play. A fall to the 200-day moving average would only be a correction of ~8%, but could be all that’s needed.
- Position close goal/limit: If I can close these contracts for a dime each by early June, I’ll exit with a smile. If XLF falls, I’ll probably consider taking the assignment since I only have $6,600 at risk and really don’t think it’ll fall much more than $1.00 below my cost per share.
Today is March options expiration, but I have nothing to report since I already closed all of my March contracts before today rolled around. In addition to the reasons I noted above, I almost didn’t make this XLF trade today. In Interactive Brokers’ system, I saw SPX open 38 points higher, followed by a drop to 25 points higher and then 15 and 12 points above yesterday’s close. That all happened in the first one minute of trading and I wondered if the sudden slip was due to quadruple witching options expiration or if there was more to it. Over the next few hours, SPX and the Dow both melted lower with only a few signs of the bulls fighting back. Half-way through the afternoon, the indexes turned negative for the day. This could be the beginning of a little move lower or it could be an anomaly because of options expiration. Interestingly, Yahoo! Finance and CNBC didn’t report the same spike at the open. I’m watching the SPX 10 and 20-day moving averages to see if they hold support. A fall below these converging moving averages could foreshadow further weakness.