Trade Details & Summary

XLU Put Calendar Spread (LIVE Opening Trade)

Scanned through our watch list to find a new low volatility and bearish trade put calendar spread giving us a wide window to profit if XLU moves lower anytime in the next month.

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In this video, we’re going to go out looking for a put calendar spread against something in the market. And today, the market is moving down considerably. At the time that we’re doing this video, the market is down about 1.5 points on the S&P. And you can see some of the highest percent movers today are things like VXX which is a VIX ETF and UVXY which is another short-term VIX futures ETF.

Those are big as the market falls, so volatility is going up which is good because it’s been pretty low. And what we want to do is we want to take advantage of hopefully a continued move down in the market if that happens and possibly a continued rise in volatility.

We’re trying to do two things here, and you can best do that with a put calendar spread. In this case, what we’re going to do is we’re going to try to find things that have low implied volatility first, so we’re just going to use our watch list here on Option Alpha to search for low implied volatility things first, rank them that way.

And in this case, we only want to deal with ETFs, so I’m not concerned about earnings trades or any stocks right now. I just filtered it out, so we can only see some ETFs. We already got some positions in DIA and SPY which is good. I think we’re going to try to do something in either XLU or XRT or something like that.

Here’s XLU. It’s got a pretty low implied volatility rank right now in the 12th percentile. And you can see if I open up the tab for XLU based on the 12 IV rank, the best trades that we want to do right now are these calendars, ratio spreads, or debit spreads.

Now in this case, since IV is so low, we’re going to go with the calendar spread. Those usually profit a little bit more from a rise in implied volatility. If I go to the charts here, this is what XLU looks like.

It’s had a huge move higher since the beginning of the year, just a colossal move higher, but the last couple of days have been hard, so we’ve seen a little bit of selling. What we’re going to try to do is maybe do a calendar that focuses on this area, so this potential profit zone somewhere around 48, 47 here in XLU.

And if this thing continues to drop, then implied volatility is going to go up a little bit more on XLU. When we go in here to XLU into our trade tab here, we’ve got a couple of different choices. We can usually do the front month options which right now are the April and the back which are May.

But in this case, the April options only have eight days to go, so we don't want to do those monthly contracts. They’re not going to give us a lot of money. We’re going only to be holding the position for a couple of days. I don’t want to take that short of a period of risk.

What we’re going to do is we’re going to do the May, June contracts. This is a little bit further out than we want, but in this case, we get a little bit more premium for selling these front-month options which are May.

Remember how I said we’re going to try to do something right around 48, 47? Since we’re going to go all the way out to June, give ourselves a little bit more time, we can go a couple of more dollars out of the money here. The stock is trading at 48, 58. We’re going to try to do the June…

Well, let’s price it out. We’ll try to do the May; June 47 put calendar spread. And I just right-clicked on that to build it out here, and we’re going to do the May and the June. This cost about $40 apiece which isn't too bad at all. If I go over to the analyze tab and analyze this trade, right now, the May, June puts us in a pretty good window to make some money.

We’ve got our breakeven points right now about 48.5, so we need a little move down in the stock to make some money, but we’ve got a nice window between about 45.5 all the way to 48.5 for the next month.

If we go back to our charts, it’s basically about here to about right here. This is our profit window. That’s about where we want to be. I like this trade. If we go a little bit further out just so you can see like if we did the 46 put calendar spread, that would shift this whole calendar just a little bit further out.

I don’t like doing the 46 in this case because the stock is trading right here at 48.60. We need a move down of almost $1 before we’re even profitable. I don’t like that trade. I like the calendar that’s a little bit closer in at the 47 strikes, so we’re going to go ahead and try to fill a couple of these calendars in here, so we’ll do three or let’s just try to do four of these actually and see what we can get here.

If I hit confirm and send, it’s only about $170 of risk, so I’m going to hit send and try to get that order filled in the market. Hopefully, that thing gets filled. We’ll pause here for a second. I think we did get filled almost immediately.

We got filled almost immediately here in XLU, so you can see we’re now into those four calendar spreads in XLU for the May, June expiration period. With these calendars, remember, we’re going to try to manage them at the May or front month expiration.

We’re only looking to hold this trade for at most 43 days if we wait for all the way until expiration. But I think this is a good trade. It should give us some good downside exposure in the market and give us also some upside volatility exposure in case volatility continues to rise.

As always, I hope you guys enjoy these live trading alerts. These are my real account, real money; this is not paper money. And as always, if you guys have any questions or comments, please ask them in the comment section right below. Until next time, happy trading!

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