FINANCIAL ETF JUMPS TO NEW HIGHS
Posted by Chuck Hughes | Dec 20, 2023 | Chuck’s Trade of the Day
On December 20th, we looked at a Daily Price Chart of Cameco Corp., noting that CCJ’s OBV line is sloping up, validating the stock’s recent bullish trend.
For today’s Trade of the Day we will be looking at a Daily Price chart for the Financial Select Sector SPDR ETF, symbol: XLF.
Before breaking down XLF’s daily price chart let’s first review the investment objective of the ETF.
The XLF ETF seeks to invest substantially all, but at least 95%, of its total assets in the securities comprising the index. The index includes companies that have been identified as Financial companies by the Global Industry Classification Standard, including securities of companies from the following industries: financial services; insurance; banks; capital markets; mortgage real estate investment trusts; and consumer finance.
Now, let’s begin to break down the Daily Price chart for XLF. Below is a Daily Price Chart with the price line displayed by an OHLC bar.
Buy the XLF ETF
The Daily Price chart above shows that the XLF ETF has been hitting new 52-Week Highs regularly this week.
Simply put, an ETF does not just continually hit a series of new 52-Week Highs unless it is in a very strong bullish trend.
The Hughes Optioneering team looks for ETFs that are making a series of 52-Week Highs as this is a good indicator that the ETF is in a powerful uptrend.
You see, after an ETF makes a series of two or more 52-Week Highs, the ETF typically continues its price uptrend and should be purchased.
Our initial price target for the XLF ETF is 39.50 per share.
131.8% Profit Potential for XLF Option
Now, since the XLF ETF is currently making a series of new 52-Week Highs this means the stock’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 the XLF ETF is flat at 37.57 at option expiration, it will only result in a 5.9% 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 12/19/2023 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 the XLF ETF increases 5.0% at option expiration to 39.45 (circled), the call option would make 62.9% before commission.
If the XLF ETF increases 10.0% at option expiration to 41.33 (circled), the call option would make 131.8% before commission and outperform the ETF return more than 13 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.
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.