Safer Transportation for IYT Bears With a Long Put Strategy

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In case the bulls’ persuasive mantra of “this time it’s different” isn’t the exception to the rule, investors can prepare and profit for a forecast of June Gloom already signaling in the Dow Jones Transportation Average. And for options traders, the iShares Transportation Average (IYT) offers a way to secure safer passage as a bear using a July long put strategy.

IYT Daily Chart

052915-iyt-stock-chart
Source: Charts by TradingView

“All aboard!” It’s not what the bulls want to see but if a picture speaks a thousand words, the broader market is in for an imminent and more bearish wake-up call based on the provided daily chart of IYT stock, which is showing lower prices ahead in the transports.

Dow Theory practitioners have been leery of the broader market for some time now as the Dow Jones Transports, and incidentally the IYT, have failed to confirm the recent highs set in the Dow Jones Industrial Average.

Now and following last week’s modest broad-based weakness, the bearish divergence in IYT has upped the technical evidence of weaker prices ahead for the market.

First, a death cross, which occurs when the 50-day simple moving average crosses below the 200-day simple moving average, triggered last Tuesday in IYT shares following the Memorial Day holiday. At the same time and quite literally, the IYT broke decisively below its early April and 2015 lows.

Further, on Friday as the SPDR Dow Jones Industrial Average ETF (DIA) finished down 0.65% to test its 50-day simple moving average; the IYT broke to even lower, yearly lows.

This same weak price behavior in IYT has manifested itself into a year-to-date decline of 9%. Not only that, IYT shares have signaled a correction-worthy pullback of 11.5% from its November 2014 high.

That all said, I believe bears can now more safely say, “All aboard!”

IYT Long Put Strategy

052915-iyt-volatility-chart
Source: Charts by TradingView

While it’s diagnosed as a technically safer environment for bears, the use of a long put strategy in IYT makes for a more secure way to position.

Implieds historically and relative to underlying IYT volatility are cheap enough to make the argument for a straight long put purchase. Additionally, consideration for a straight purchase is made stronger due to somewhat weak liquidity; making spread positions much more difficult to establish and exit and especially beyond the front month June contract.

Bearing all of what’s been proffered in mind, the slightly in-the-money Jul $152 put priced for $5.30 mid-market is attractive. The premium paid amounts to roughly 3.5% of the underlying IYT stock price.

At the same time, if IYT moves lower, this contract will gain a bit more than 60 cents in value versus the first 1-point decline in shares of IYT. That profit ratio would also continue to improve as the put goes deeper in the money, were IYT to continue moving lower.

The use of July allows the trader to have some time on the calendar before time decay becomes more significant a factor. And due to the Jul $152 put’s position, with IYT near $149, a bit more than 50% of its value is currently intrinsic or real stock value.

At expiration, whatever intrinsic value is built into the option price can’t be lost. As this relates to the July contract, if IYT was at $149 at expiration, the put would be worth $3 and the trader would have lost $2.30, rather than the full $5.30 purchase price. If IYT stock were to motor aggressively higher above $152, the whole $5.30 is at risk come expiration.

While the risk is always under control, the view is money management and IYT’s technical picture should be given consideration. This might mean using an initial trailing stop at $153 and slightly above last week’s bearish signal highs as an exit approach to reduce losses and not stay on board IYT as it does potential damage to the current bear case.

 As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2015/06/safer-transportation-for-iyt-bears-with-a-long-put-strategy/.

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