May 20th, 2022
Yesterday, we looked at a Daily Price Chart for Nike, Inc., noting that the stock’s 50-Day EMA is trading below the 100-Day EMA signaling a ’Sell’.
For today’s Trade of the Day we will be looking at a Daily Price chart for the SPDR S&P Retail ETF, symbol: XRT.
Before breaking down XRT’s daily price chart let’s first review the investment objective of the ETF.
The XRT ETF seeks to track the performance of the S&P Retail Select Industry Index, the fund employs a sampling strategy. It generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index. The index represents the retail segment of the S&P Total Market Index.
Now, let’s begin to break down the Daily Price chart for XRT. Below is a Daily Price Chart with the price line displayed by an OHLC bar.
Sell the XRT ETF
The Daily Price chart above shows that the XRT ETF began reaching a series of lower lows and lower highs since late March.
This pattern of bearish trading suggests the ETF will continue to march further into a decline.
You see, after an ETF makes a series of two or more lower lows and lower highs, the ETF typically continues its price downtrend and bearish positions should be initiated.
Our initial price target for the XRT ETF is 57.60 per share.
76.8% Profit Potential for XRT Option
Now, since XRT is making a series of lower lows and lower highs, the ETF’s bearish decline will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an XRT put option purchase.
The Put Option Calculator will calculate the profit/loss potential for a put option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat XRT price to a 12.5% increase.
The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following XRT option example, we used the 1% Rule to select the XRT option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.
Trade with Higher Accuracy
When you use the 1% Rule to select an XRT in-the-money option strike price, XRT only has to decrease 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money put option and the underlying ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if the XRT ETF is flat at 62.69 at option expiration, it will only result in a 4.8% loss for the XRT option compared to a 100% loss for an at-the-money or out-of-the-money put option.
Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money put options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.
The goal of this example is to demonstrate the powerful profit potential available from trading options compared to ETFs.
The prices and returns represented below were calculated based on the current ETF and option pricing for XRT on 5/19/2022 before commissions.
When you purchase a put option, there is no limit on the profit potential of the put if the underlying ETF continues to move down in price.
For this specific put option, the calculator analysis below reveals if XRT decreases 5.0% at option expiration to 59.56 (circled), the put option would make 36.0% before commission.
If XRT decreases 10.0% at option expiration to 56.42 (circled), the put option would make 76.8% before commission and greatly outperform the ETF’s return.
The leverage provided by put options allows you to maximize potential returns on bearish ETFs.
The Hughes Optioneering Team is here to help you identify winning trades just like this one.
Interested in accessing the Optioneering Calculators? Join one of Chuck’s Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.
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Wishing You the Best in Investing Success,
Editor, Trade of the Day
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