4 ETF Sector Options to Buy Now

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Solid ETFs for a Weak Market

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The exchange-traded fund (ETF) has proven to be one of the most popular options trading vehicles of the last decade. The vast popularity of ETFs has led to a broad range of investment products, from the very popular SPDR S&P 500 (NYSE: SPY) covering the market, to commodities/metals tracked by the iShares Silver Trust (NYSE: SLV), to market sectors, like the Financial Select SPDR (NYSE: XLF).

Options trading investors too have been using these ETFs.  During the first quarter ETF option trading volume rose 37% and accounted for about one-third of all trading in options.

The market has been in doldrums recently making it difficult to find any equity to get behind. So we asked several of our options experts to offer trades on sector ETFs and their offshoots the Exchange Traded Notes (ETNs). Some sectors have been easily outpacing the market, such as commercial real estate as covered by the IShares Dow Jones U.S. Real Estate Index (NYSE: IYR) and the Health Care Select Sector SPDR (NYSE: XLV). Please click through and find our experts’ four trades and why they make sense now.

 

United States Oil Fund (NYSE: USO)

By Tyler Craig, Tylers Trading

Of all the exchange-traded funds that offer investors exposure to crude oil, the United States Oil Fund (NYSE: USO) is undoubtedly the most popular. With an average daily trading volume around 17 million shares it seems to have become the go-to trading vehicle for gaming oil’s day-to-day gyrations. Option trading investors will also be pleased to hear that USO offers option contracts that not only have tight bid/ask spreads but also strike prices every $1. Due to the structure of the USO fund it does under perform the actual performance of crude oil prices over time — an unfortunate reality. Nonetheless the USO has exhibited consistent neutral to mildly bullish behavior over the past year and may yet continue to do so in the coming months. Traders may consider purchasing shares of the USO and selling the USO July 40 Call for $1.40.

 

IPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX)

By Tyler Craig, Tylers Trading

Ever since its genesis in early 2009 the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) has experienced a virtually uninterrupted drop towards zero. While its structural inefficiencies have been a thorn in the side for those seeking long volatility exposure, traders initiating bearish positions have found this ETN to be a genuine cash cow. To extend its shelf life, Barclays Bank PLC implemented a 1-for-4 reverse split back on November 9th, 2010 which took its share price from a meager $11 to $44. Following the split VXX continued its day-by-day demise and now sits around $22. Unless the market experiences the type of surge in volatility that accompanies severe corrections or bear markets, the VXX should continue to drift lower. Traders of the opinion that the market won’t completely crater in the coming months may consider purchasing puts like the VXX September 23 Put for around $3.50.

 

Health Care Select Sector SPDR (NYSE: XLV)

By Chris Johnson and Jon Lewis, Editors, The Winning Edge

Health care is a sector you always hear about as the classic defensive play. That’s because these stocks tend to do well while the broader market struggles. And that has been the case for most of 2011.

XLV is up nearly 13% so far this year compared to just 3% for the S&P 500 Index Option (CBOE: SPX). Other than a pullback in early March and a slide over the past three weeks or so, XLV has plowed steadily ahead and is now poised to challenge its all-time high reached in late 2007. What’s more, the ETF is bouncing off the solid support of its 50-day moving average, which has contained most pullbacks for the past 10 months.

Speaking of the 50-day, XLV has a high percentage of its components trading above their respective 50-day moving averages. That tells us that XLV has strong underlying technicals that should carry the ETF at least through the summer.

With the economy hitting a “soft patch,” the next couple of months do not look overly encouraging for the broader indices. We like the defensive names — especially health care — to get us through the summer doldrums. Buy the XLV September 35 Call for $1.50 or less.

 

IShares Dow Jones U.S. Real Estate Index (NYSE: IYR)

By Chris Johnson and Jon Lewis, Editors, The Winning Edge

IYR represents the commercial end of the real-estate market with major components such as Simon Property Group (NYSE: SPG), Vornado Realty Trust (NYSE: VNO), and Host Hotels & Resorts (NYSE: HST). Unlike the dismal residential housing market, the commercial sector (which includes multi-unit family housing) has been getting healthier as it comes off a bottom in demand for commercial space.

Though IYR has struggled for the past couple of months, it has more than doubled the return of the S&P 500 Index Options (CBOE: SPX) so far this year. After peaking last month at a multi-year high, the ETF pulled back to what appears to be a solid basis of support around the 60 level. The 60 mark defined tops in February and April and marked a bottom last month. It is also the site of heavy put open interest, which often acts as support.

Despite IYR’s out performance in 2011, skepticism abounds. The ETF’s short-interest and put/call ratios are coming off multi-year highs, a sign that extreme pessimism is beginning to unwind. But these ratios remain at very high levels, suggesting that there’s plenty of pent-up buying power to boost IYR higher. Let’s buy enough time to let the upside momentum take over. Buy the IYR September 60 Call for around $2.50.


Article printed from InvestorPlace Media, https://investorplace.com/2011/06/4-etf-sector-options-uso-iyr-vxx-xlv-healthcare-real-estate-oil/.

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