You won’t believe what happened today…
While getting some work done on the house, a construction guy asked me what I do. I told him that I’ve been trading for nearly 30 years and coach investors on pinpointing low-cost, low-risk, and high-profit trades. So he asked me for some tips on how to cash in on the stock market’s new all-time highs – especially during the holiday season.
I told him exactly what I’ll tell you…
You could spend hours upon hours researching every single “holiday stock” out there and how it’s performed historically, especially since Black Friday…
Or you could save your precious time – and simply trade the whole sector.
your precious time – and simply trade the whole sector.
And here’s how…
Using Options to Cash in on Consumer Discretionary Stocks
With Black Friday 2016 in the books, you’re now going to be hearing about how well each toy, clothing, electronics, and car company did. These reports will speak to how well investors feel about these stores after they’ve already invested in or placed trades on them, how these companies fared compared to other years, and what that could mean for your portfolio. You’ll also be hearing about whether or not you should buy more shares of these “holiday stocks” or sell them.
The reports I’ve seen and heard recently are to the effect that the post-Thanksgiving sales for automobiles have been okay, but not great. The pundits are also reporting that while people are shopping more this year, they’re spending less per purchase by 3.5%. So it looks like traffic is up, but sales are about the same (or a bit less) for now.
Personally, I think the “Trump effect” is in place. People seem to be a bit more optimistic about the incoming administration and are more willing to spend a bit more this holiday season, even if less per purchase.
Regardless… This is a lot of information to have to track for a lot of individual stocks. And doing so involves a lot of time that I’m sure you simply don’t have right now.
So, as I told my construction guy, this is when options come into play. When you use options, you don’t have to be biased one way or the other – you just need the data. From there, you can set the most profitable trades and get back to the more important things you were doing before.
And the best way to do it is to trade options on an extremely liquid exchange traded fund (ETF) that tracks the Consumer Discretionary Select Sector Index: Consumer Discretionary Select Sector SPDR (NYSEARCA: XLY). XLY’s top five holdings (34% of the ETF) are Amazon.com (NASDAQ: AMZN), Home Depot (NYSE: HD), Disney (NYSE: DIS), Comcast (NASDAQ: CMCSA) and McDonald’s Corporation (NYSE: MCD). Since April 26, 2016, XLY has risen 3.24% and is in an uptrend.
Now you may have heard recently that an unusually high number of put contracts were traded on XLY yesterday, which some say indicates a bearish trend for the overall sector. Keep in mind, though, that these are options trades – so we don’t actually know how many of those contracts were bought or sold. And it really doesn’t matter, either way…
In fact, as of the time I’m writing, XLY continues to trade at its 52-week highs. Take a look at the upward movement it’s made since the beginning of the month (even before Election Day):
XLY has broken out to over five month highs. In the chart above, I’ve drawn in a technical line to show you where resistance used to be. Any kind of retracement and hold of that $82 price would indicate buyers’ conviction at that level, meaning it should become new support If the retracement in pricing falls back below that $82 price area, look to the Fibonacci retracement levels to find a support area.
In the chart below, you can see the 38.2%, 50% and 61.8% retracement prices.
If XLY retraces and then starts to bounce from one of these levels, then you’ve got some bullish profit opportunities to consider, like this one…
Introducing the “LEAPs Loophole” Trade
We’ve talked about Long-Term AnticiPation Securities (LEAPs) before. And as you’ll recall, these are options with expiration dates of up to three years. They’re no different from shorter-term options in that they have an expiration date, they can be found for both calls and puts, and they can be exercised.
LEAPs offer traders the ability to “hold” their options positions for longer terms (up to three years) without having to combine several different shorter-term options contracts. But remember… the more time you’ve got until the option’s expiration, the more expensive it is due to the time value component of the option’s price.
So creating a LEAPs “loophole” (or spread) trade is how you fix that problem.
A LEAPs loophole trade is no different from other vertical call spreads (which my Money Calendar Alert members frequently trade), where you buy a lower-strike call and sell a higher -strike call simultaneously on the same order ticket. So when creating a LEAPs loophole trade, you’d simply buy a higher-strike LEAP option and sell a lower-strike LEAP option simultaneously on the same order ticket. This “spreads” your risk and cost even further while boosting your profits regardless of market volatility.
Right now, the most active LEAPs call on XLY has an expiration date of January 19, 2018. So a great consideration for a LEAPs loophole trade is buying-to-open a lower-strike LEAPs call with a January 19, 2018 expiration date and selling-to-open a higher-strike LEAPs call with the same expiration date. Remember, you’ll need to buy and sell both LEAPs at the same time on the same order ticket in order to create the spread.
One thing to keep in mind with LEAPs and LEAPs loophole trades is that you’re trading limited risk for limited rewards. With a LEAPs loophole trade, your profits lie in the difference between the two strike prices.
But… this also means that you’ve got the opportunity for more profitable trades than losing trades. And when you compare that to lower-probability trades with much higher risk and much higher cost, this is a compromise you can feel pretty darn good about.
To your continued success,
Tom Gentile
