Options Trade #10 - XLP Short Put

Updated: Dec 18, 2018

VTS Community

Things have calmed down somewhat today but yesterday's volatility event shouldn't be ignored.  The VIX index was actually up over 42% at one point mid-day so there was definitely some legitimate fear there.  And you know for me, there's no room in my investing for "going for it" or being contrarian.  I just move to safety and wait for the storm to pass.  And I mean every time.  You only have to get caught in a thunder storm once to learn the lesson.  Been there done that, so I don't mess with a VIX spiking over 40%  :)

I mentioned that there's a new option trade type in the pipeline but unfortunately that one is only appropriate for low volatility environments.  After yesterday it's no longer available so we'll just dig into our existing tool box and open another Wheel of Fun Put.

I've been emailed about potential candidates which is great.  I'm glad people are enjoying branching out and trying a few of their own.  I had some shoutouts for Celgene (CELG), Johnson and Johnson  (JNJ), Pepsi  (PEP), Procter & Gamble  (PG), Walmart  (WMT).  All of them have potential but allow me to offer my personal opinion on a better selection:

1 year chart of XLP  (Consumer Staples Select ETF)

Since we're already in one individual name  (CVS)  and we recently got into silver  (SLV)  as well, to balance things out and manage risk I think it's best that our next trade sticks to a broad ETF.  And since the whole consumer staples sector has been beaten down of late, it's a great choice.

The Trade: SELL to OPEN 1 x 15 June 18' XLP 50 PUT Credit:  ~ 0.62

Margin requirement: -  1 option contract  =  100 shares if assigned -  100 shares of XLP @ 50.00  =  5,000 -  This trade requires 5,000 in margin per contract -  This is roughly 20% of the VTS Discretionary fund

* scale according to your allocation size and risk tolerance

Stop-loss: -  We always use a 10% stop-loss on this type of trade -  5,000 per contract is what the trade is valued at -  5,000 * 10%  =  500

* If we are down more than 500$ per contract we will close it

Future action: Standard wheel of fun put trade.  We'll wait until June expiry and see what happens.  If XLP expires above 50 the trade is over and we'll look for another target.  If XLP expires below 50 we'll be assigned the shares and immediately sell a covered call to try to get rid of them.  Rinse repeat until we either lose the shares or hit our stop-loss.

As a personal investing preference, I always try to stick to broad indexes and ETFs whenever possible. 

Trading the entire consumer ETF is more stable than picking out an individual name and using that.  The trade works on both, but I've been using this strategy type for about a decade now and in my experience hitting stop-losses is far more common with individual names so I like to mix it up.

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