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Profit from XLF Financials’ Flop

Option spread garners income from lagging ETF


A strategy idea for options trading investors.

When scanning the market for trading opportunities many investors adopt a sector-centric approach. Instead of beginning their search by rummaging through the thousands of individual stocks, they identify which sectors are strongest or weakest and thus most likely to yield the best bullish or bearish candidates.

Many turn to performance charts which offer a quick side-by-side comparison of the major sectors in the marketplace. The simple display in which the chart portrays sector performance makes it easy to draw quick conclusions as to the leaders and laggards of the market over a certain time frame. The chart below shows how the nine major US sectors have stacked up versus the S&P 500 Index over the past 36 days.

As shown in the red bar the Financial Select Sector SPDR ETF (NYSE: XLF) has been the weakest performer over this time frame. This week we’ve already had Tuesday’s market surge quickly reversed by yesterday’s post-Fed announcement plunge so the markets may be in for yet more downside. Those seeking additional bearish exposure may consider zeroing in on the financial sector for tradable opportunities.

Consider a bearish put spread on the XLF. Buy to open the XLF Aug 15 Put and sell to open the XLF Aug 14 Put. Like all vertical debit spreads the maximum risk is limited to the initial debit paid and the maximum reward is limited to the distance between the strike prices minus the net debit. If entered around $.35, this XLF  Aug 15 — 14 Put Spread offers a maximum risk of $35 and a maximum reward of $65.

Source:  StockCharts.com

At the time of this writing Tyler Craig had no positions on XLF.

Follow Tyler Craig on Twitter@TylersTrading.

Article printed from InvestorPlace Media, http://investorplace.com/2011/06/financials-etf-xlf-options-trade/.

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