Play the Metal Stock Resurrection With SPDR S&P Metals and Mining (ETF) (XME)

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The SPDR S&P Metals & Mining (ETF) (NYSEARCA:XME) is one of the strongest exchange-traded funds on the planet. Here’s how to think about Wednesday’s rally, and how to position yourself for more upside using XME options.

Yesterday had all the makings of a pullback. Stocks entered the session already extended, and the S&P 500 gapped down on China bond worries. Amid such an environment, a modest retreat seemed all too likely.

But those silly sellers forgot this market’s more resilient than a bronco-mounting cowboy. Enter XME. While the selling pressure lasted for thirty minutes in the S&P 500 before buyers fought back, it lasted all of one second in XME.

Metal stocks, emboldened by the recent winning streak, galloped higher right out of the gate ending the day with one heckuva bullish engulfing candle. The past five days’ trading range was consumed in one fell swoop.

By days end, XME had lifted to $38.11 notching a new three-year high. The latest leg in XME’s ongoing recovery has been a sight to behold. Since mid-November when the metals and mining ETF troughed at $29.68 we’ve witnessed a one-sided 28% rally.

Buyers are gobbling up shares with the enthusiasm of the blockchain trade.

Source: OptionsAnalytix

The ascension has obviously lifted moving averages across all the time frames.

The 20-day, 50-day and even 200-day moving averages are all now rising in bullish fashion. And while a multi-day pullback would have been a welcome development, bringing a lower-risk entry to would-be buyers everywhere, the underlying bid for metal and mining stocks is simply too strong.

Wall Street is in “prepare for inflation mode,” and capital is flooding into late-cycle sectors and industries.

A Me-Too Metals Trade

If you think yesterday’s XME price jump is indicative of more upside, here’s an options trade to help you get in on the action. It’s a more aggressive trade designed to capitalize fully if metal and mining stocks really get silly to the upside. Some traders call this a risk reversal.

Sell the March $36 put for 75 cents and buy the March 40 call for 78 cents. The whole trade can be entered for around a 3 cent debit.

The position breaks even if XME sits between $36 and $40 at expiration. The provides a reasonable margin for error if metal stocks suddenly decide to pause. But if the rallying persists, this position has unlimited reward to the upside.

If XME somehow falls from grace, you will be obligated to buy shares at a basis of $36.03 which may not be all that bad of an entry price for a longer-term bullish trade.

As of this writing, Tyler Craig held bullish positions in XME. Want more education on how to trade? Check out his trading blog, Tales of a Technician.

For a free trial to the best trading community on the planet and Tyler’s current home, click here!


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/play-the-metal-stock-resurrection-with-spdr-sp-metals-and-mining-etf-xme/.

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