Wednesday, October 5, 2016

XLU Analysis

Update Nov. 10, 2016: XLU declined sharply, bringing the price within the profitable range on my bearish vertical spread, and I exited at 79% of maximum potential profit.

Shares declined by 1.75 over 36 days, or a -17.2% annual rate. The options position produced a +383.3% yield on debit for a +3,887% annual rate.

The Utilities Select Sector SPDR Fund (XLU)  showed sufficiently high implied volatility on Wednesday to warrant a closer analysis and possibly a trade using short options spreads as a vehicle.

The fund's top holdings by percent of the total portfolio are NextEra Energy (NEE), Duke Energy Corp. (DUK), Southern Company (SO), Dominion Resources (D) and American Electric Power Company (AEP).

[XLU official page]

The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts
by Stephanie Krewson-Kell and R. Brad Thomas


I shall use the NOV series of options, which trades for the last time 44 days hence, on Nov. 18.


Implied volatility stands at 20%, which is  times the VIX, a measure of volatility of the S&P 500 index. XLU’s volatility stands in the 53rd percentile of its annual range. The price used for analysis was $47.08.

Ranges implied by options and earnings
WeekSD1 68.2%SD2 95%Earns
Implied volatility 1 and 2 standard deviations; central tendency earns move

The Trade

XLU began a sharp and unrelenting decline on Sept. 27. I shall use a bear strategy.

Bear call spread, short the $48 calls and long the $50 calls,
sold for a credit and expiring 
Nov. 19.
Probability of expiring out-of-the-money


The premium is $0.58, which is 29% of the width of the position’s wings.

The risk/reward ratio is 2.5:1.

The short call is 86 cents above the price at the time the order was placed.

Decision for My Account

I have entered a positon on XLU as described above. The stock at the time of entry was priced at $47.14.

-- Tim Bovee, Portland, Oregon, Oct. 5, 2016


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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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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