Friday, February 13, 2015

XRT: Bull play, shorter-term rules

Update 5/8/2015: XRT dropped briefly into unprofitability with a month to go before expiration. To avoid a double loss of price and time decay, I exited on a bounce.

Shares rose 1.6% over 84 days, or a +7% annual rate. The options position produced an 11.1% yield on debit, for a +50% annual rate.

Update 2/13/2015: I've opened a bull position in XRT as described in "The Trade" section below.

The SPDR S&P Retail exchange-traded fund (XRT) broke above its 20-day price channel on Thursday and confirmed the bull signal by trading still higher on Friday.

[Retail in Wikipedia]



XRT has been in an uptrend since bouncing from its Great Recession low in 2008. It has been one of those galloping uptrends, where one wave follows another with such rapidly and so little differentiation that Elliott wave analysis is difficult.

The Elliott frame I've laid on the longer-term chart (left) places XRT in a 3rd wave to the upside at the highest magnitude of the count. Within that, it is in the 3rd, or middle, wave, and down one more level, in the 5th and final wave.

The end of the lower-level wave, 5 {+1} will trigger a counter-trend correction of the rise from slightly below $50, the point labeled as the end of wave 2 {+2} on the chart. Corrections of course, rarely retrace the entirety of a rise. Sometimes they can be quite shallow. But it will be significant.

The close-in view on the right-hand chart suggests that the reversal is some time away, since wave 5 {+1} is as yet only in its middle wave, wave 3 on the chart. Third waves tend to travel further and last longer than the other waves in a set.

Zacks Investment Research gives XRT a bull rating.

Click on chart to enlarge.
8 years 4 months weekly bars (left), 2 years daily bars (right)


Implied volatility stands at 18%, in the 26th percentile of the most recent rise. That low level of volatility makes long options spreads, bought with a debit, the most likely tactic to produce a profit.

I calculate ranges based on the options pricing algorithm, which allow identification of the one standard deviation range, expected to contain 68.2% of trades during the period under analysis, and the two standard deviation range, expected to contain 95% of trades.

I'm trading June options for long positions at this time. They trade for the last time 126 days from now, and that's the period used in computing the standard-deviation ranges below.

For the chart range, I've used today's high as the upper boundary and the beginning of the current wave 3 for the lower boundary.

Ranges implied by options and the chart
WeekSD1 68.2%SD2 95%Chart
Implied volatility 1 and 2 standard deviations; chart support and resistance

Odds and Yields

XRT has completed two breakouts since wave 5 {+1} began on Oct. 15, 2014. One was successful, yielding 5.0% over 41 days. The unsuccessful trade lost 3.4% over eight days,

The Fund

XRT's top five holdings are CONN, RAD, NFLX, JCP and ODP.

The expense ratio is 0.35%, compared to 0.09% on the S&P 500 fund SPY, the most traded symbol on the U.S. markets.

The dividend yield is 0.73%, compared to 2.01% for the 10-year U.S. Treasury note.

XRT goes ex-dividend in March for a quarterly payout of 18.07 cents per share.


XRT on average trades 2.6 million shares a day and supports a moderate selection of option strike prices, with open interest running to three figures near the money on puts, and mainly two figures on calls.

Options are trading at a heavy pace today, with calls running at nearly double their five-day average volume and puts at 79% above average.

The Trade

The distribution of open interest on the June grid allows only one way to build a long vertical bull position. I require open interest of 100 or better on all legs of a spread, and of the out of the money strikes, only $98 fills that requirement.

Constricting, but not awful

Bull call spread, long the $97 calls and short the $98 calls
bought for a debit and expiring June 20
Probability of expiring in-of-the-money


The risk/reward ratio stands at 9:11 (1.2 to 1).

Decision for My Account

I intend to open a bull position on XRT, as described above, if upward momentum continues near the closing bell.The uptrend is in blue-sky territory, with no upside resistance.

-- Tim Bovee, Portland, Oregon, Feb. 13, 2015


My volatility trading rules can be read here. For a discussion of the rationale behind the rules, see my essay, "Rules for very short term trades".

The directional score is calculated as the sum of the following:
  • Zacks rating --The Zacks ratings are translated as follows: 1=2, 2=1, 3=0, 4=-1 and 5=-2.
  • Enthusiasm rating --: A single percentage derived from the number of analysts whose opinions are in one of five categories: Strong buy, buy, hold, sell and strong sell.
  • Strong buy share -- The percentage of all analysts who rank the stock strong buy. If the share is 60% or greater, the score is 1; if 40% or less, then the score is -1; otherwise, the score is zero.
  • Ethusiasm momentum -- The score is 1 if today’s enthusiasm rating is larger than the rating 30 days earlier; otherwise, the score is zero.
  • 30-day direction -- The trend that best describes the 30-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.
  • One-day direction -- The trend that best describes the one-day chart: 1 for an uptrend, -1 for a downtrend and zero for a sideways trend.

From time to time I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner 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

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.


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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.

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