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This morning I am recommending a bearish trade on the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) .
We are in a volatile market. The CBOE Volatility Index (INDEXCBOE:VIX) is channeling sideways, with the 200-day moving average acting as support.
Daily Chart of CBOE Volatility Index (VIX) — Chart Source: TradingView
Generally, if the VIX stays below 17, I will maintain a bullish stance on the market.
However, since it has found support just under that level at the 200-day moving average twice now (circled in red on the chart), volatility will likely remain high.
Utilities are a defensive sector in times like these. Investors and traders look to this sector when volatility and uncertainty are high, and that’s why I’ve been looking to make a play on the XLU.
Daily Chart of Utilities Select Sector SPDR ETF (XLU) — Chart Source: TradingView
Looking at the chart of the XLU above, we can see it has been trending upward since February of this year. But now it is approaching the $57 level, which marked the highs in late 2017.
I wouldn’t be surprised if the stock rises back to or just above $57 again in the near term, but at that point it will likely encounter strong resistance and head down again.
If that happens, it should allow us to enter a cheap downside play with a big potential for profits. For that reason, I am recommending a put debit spread on the XLU.
Using a spread order, buy to open the XLU Mar. 15th (2019) $55 put and sell to open the XLU Mar. 15th (2019) $52 put for a net debit of about $0.65.
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 put debit spread is a way to lower the cost of buying bearish put 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.
