XLV Analysis

Update 12/1/2016; XLV rose sharply after I entered this positon and then began working its way back to the downside, with implied volatility slipping all along the way. I exited the position today at 52% of potential profit.

Shares had a net rise of 2.9% over 30 days, or a +36% annual rate. The options position produced a 106.9% yield on debit for a +1,301% annual rate.

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The Health Care SPDR exchange-traded fund (XLV) closed with high volatility on Monday and so qualifies for further analysis as an options play.

[XLV in detail]

XLV

I shall use the DEC series of options, which trades for the last time 45 days hence, on Dec. 16.

Ranges

Implied volatility stands at 25%, which is double the VIX, a measure of volatility of the S&P 500 index. XLV’s volatility stands in the 68th percentile of its annual range. The price used for analysis was $66.99.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	72.81	78.57	N/A
Lower	61.27	55.51	N/A
Gain/loss	±$5.77	±$11.53

Implied volatility 1 and 2 standard deviations; central tendency earns move
The Trade

XLV has been in a sideways pattern since August 2015 as a countertrend correction within a rise that began in March 2009.

JFK and the Reagan Revolution: A Secret History of American Prosperity by Lawrence Kudlow

Zacks Investment Research gives XLV a bullish rating. The top five holdings are Johnson & Jonson, Pfizer, Merck, United Health Group and Medtronic.

Since the price movement is sideways, I shall go with a neutral strategy.


Iron condor, short the $70 calls and long the $72 calls,
short the $62 puts and long the $60 puts,
sold for a credit and expiring Dec. 17.
Probability of expiring out-of-the-money

DEC	Strike	OTM
Upper	70	76.0%
Lower	62	78.7%

The premium is $0.60, which is 30% of the width of the position’s wings.

The risk/reward ratio is 2.3:1.

The zone of profit in the proposed trade covers a $4 move either way.

Decision for My Account

I have placed an order on XLV and shall update with the fill. The stock at the time of the order was priced at $66.60.

-- Tim Bovee, Portland, Oregon, Nov. 1, 2016

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.


Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading. 

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.