Utilities have been hit extremely hard, probably because everybody thinks interest rates are going to go up — but I don’t think they’re going to go up that much at this point. So, I’m seeing an opportunity to profit on a bounceback after the bears overdid it on the downside.
If you look at Utilities SPDR (ETF) (NYSEARCA:XLU), you can see it’s really taken a pretty good dive for stocks that do not make that big a move overall. This provides us with an opportunity to get positioned on a bullish play. Specifically, I’m recommending an XLU call debit spread:
Using a spread order, buy to open the XLU March 16th $51 call and sell to open the XLU March 16th $53 call for a net debit of about $0.65.
Note: There are several March expirations available for XLU options. Be sure you are opening the monthly options that expire on Friday, March 16, 2018.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.