Selling Mounts in Financial Sector ETF

Dear Reader,

Yesterday, we looked at a Daily Price Chart of Microsoft Corp. 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 an On Balance Volume chart for the Financial Select Sector SPDR Fund ETF, symbol: XLF.

Before breaking down XLF’s OBV chart let’s first review the investment objective for the ETF.

The XLF ETF fund generally invests substantially all, but at least 95%, of its total assets in the securities comprising the index. The index includes securities of companies from the following industries: diversified financial services; insurance; banks; capital markets; mortgage real estate investment trusts; consumer finance; and thrifts and mortgage finance.

Confirming a Price Downtrend with OBV

The XLF daily price chart below shows that XLF is in a price downtrend as the current price is below the price XLF traded at six months ago (circled). The On Balance Volume chart is below the daily chart.

On Balance Volume measures volume flow with a single Easy-to-Read Line. Volume flow precedes price movement and helps sustain the price downtrend. When an ETF closes up, volume is added to the line. When an ETF closes down, volume is subtracted from the line. A cumulative total of these additions and subtractions form the OBV line.

On Balance Volume Indicator

● When Close is Up, Volume is Added

● When Close is Down, Volume is Subtracted

● A Cumulative Total of Additions and Subtractions form the OBV Line

Volume flow precedes price and is the key to measuring the validity and sustainability of a price trend.

We can see from the OBV chart below that the On Balance Volume line for XLF is sloping down. A down-sloping line indicates that the volume is heavier on down days and selling pressure is exceeding buying pressure. Selling pressure must continue to exceed buying pressure in order to sustain a price downtrend. So, On Balance Volume is a simple indicator to use that confirms the price downtrend and its sustainability.

The numerical value of the On Balance Volume line is not important. We simply want to see a down-sloping line to confirm a price downtrend.

Confirmed ‘Sell’ Signal for XLF

Since XLF’s OBV line is sloping down, the most likely future price movement for XLF is down, making XLF a good candidate for a put option purchase.

Let’s use the Hughes Optioneering calculator to look at the potential returns for an XLF 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 XLF price to a 12.5% decrease.

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 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 XLF is flat at 30.64 at option expiration, it will only result in a 1.2% loss for the XLF 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 XLF on 9/29/2022 before commissions.

When you purchase a put option, there is virtually no limit on the profit potential of the put if the underlying ETF continues to decline in price.

For this specific put option, the calculator analysis below reveals if the XLF ETF decreases 5.0% at option expiration to 29.11 (circled), the put option would make 43.9% before commission.

If the XLF ETF decreases 10.0% at option expiration to 27.58 (circled), the put option would make 88.9% before commission and greatly outperform the stock 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 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.

Average Portfolio Return of 121.9%

Below is a screenshot of the current open trade profit opportunities from Chuck’s Weekly Option Alert Trading Service. There are currently $161,592.40 in open trade profit opportunities with an average portfolio return of 121.9% demonstrating the ability of the Optioneering Strategy to deliver substantial returns with no losing portfolios**.

**Open trade profit results represent the open trade profit performance for the portfolio displayed on 9/29/22. Open trade profits may have increased or decreased when trades were closed out. Trading incurs risk and some people lose money trading. Past performance does not necessarily predict future results. Member profits and losses are not tracked. Profit potential is taken from results of signaled trades, not actual member results. Not all members make the trades.

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Wishing You the Best in Investing Success,