FINANCIAL ETF BREAKS TO NEW HIGHS: XLF
July 23rd, we looked at a Daily Price Chart of KKR & Co Inc., noting that KKR shares have been making a series of higher highs and higher lows.
For yesterday Trade of the Day e-letter we will be looking at a monthly chart for the Financial Select Sector SPDR ETF, symbol: XLF.
Before breaking down XLF’s monthly chart let’s first review what products and services the company offers.
The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.
Now, let’s begin to break down the monthly chart for the XLF ETF.
Below is a 10-Month Simple Moving Average chart for the XLF ETF.
Buy the XLF ETF
As the chart shows, in November, the XLF 1-Month Price, crossed above the 10-Month simple moving average (SMA).
This crossover indicated the buying pressure for the XLF ETF exceeded the selling pressure. For this kind of crossover to occur, an ETF has to be in a strong bullish uptrend.
Now, as you can see, the 1-Month Price is still above the 10-Month SMA. That means the bullish trend is still in play!
As long as the 1-Month price remains above the 10-Month SMA, the ETF is more likely to keep trading at new highs and should be purchased.
Our initial price target for XLF is 45.25 per share.
98.2% Profit Potential for XLF Option
Now, since XLF’s 1-Month Price is trading above the 10-Month SMA this means the ETF’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an XLF call option purchase.
The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat XLF 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 XLF option example, we used the 1% Rule to select the XLF 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 XLF in-the-money option strike price, XLF only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call 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 XLF is flat at 43.17 at option expiration, it will only result in an 8.9% loss for the XLF option compared to a 100% loss for an at-the-money or out-of-the-money call 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 call 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 XLF on 7/23/2024 before commissions.
When you purchase a call option, there is no limit on the profit potential of the call if the underlying ETF continues to move up in price.
For this specific call option, the calculator analysis below reveals if XLF increases 5.0% at option expiration to 45.33 (circled), the call option would make 44.6% before commission.
If XLF increases 10.0% at option expiration to 47.49 (circled), the call option would make 98.2% before commission and outperform the ETF return nearly 10 to 1*.
The leverage provided by call options allows you to maximize potential returns on bullish ETFs.
The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.
*Trading incurs risk and some people lose money trading.