I don’t know about you but I’ve been noticing more and more that finances are tightening up for a lot of people.
Our government had been printing money like crazy, gas prices are up over $4 per gallon and here in Cali are at $6. You’ve probably noticed that when you go to the grocery store these days, you’re spending quite a bit more than you have in the past.
And to top it off, if you are a recent college graduate or parent of one, the start of the student loan repayment plans which was delayed is now starting up again. Yeah it’s only a couple hundred grand to go to college now…
So what do you think people are going to do? Continue spending and run up debt?
Yeah…. But I think a lot of people are also going to be a little more practical and maybe look at ways to cut back on their spending and maybe make more money through some sort of side hustle. Like option trading…….
Well there’s a way that we can use this information to make some money in the short term and maybe create some extra income to help pay those higher bills!
In this video we are going to cover:
- What is the Consumer Discretionary ETF XLY?
- Where is XLY Year To Date pricewise?
- What is an option strategy that we use to profit on less consumer spending?
- How do you buy a long Put Debit Spread in XLY? (I’ll show you a real example on the option trading platform)
- How do we manage the Long Put Vertical Debit Spread?
——————————————————————–
Hey guys, Darren here. We have a video for you here today.
Although before we start, if you appreciate all the research and information that goes into making a video like this, all I ask for in return is that you hit the like button and subscribe. That’s it, it helps out the channel tremendously. So thank you guys so much!
Today we are covering the Long Call Debit Spread in XLY the Consumer Discretionary ETF.
I think it’s important that we understand all the different strategies and ways that the rich are getting richer. So that we can have the tools to do the same and do better for ourselves in any market while doing it safely.
————————————————————
Be sure to download the FREE options Workshop in the link below.
It talks about the two main benefits of trading options over buying stocks.
DISCLAIMER, I am not a financial planner and I am not recommending trades. Please do your own research and if you are new or learning options, I recommend you start small.
—————————————-
What is the Consumer Discretionary ETF XLY?
Ticker symbol XLY is a Consumer Discretionary Exchange Traded Fund that has 52 different holdings.
We know that Consumer means all of the people like you and I that purchase goods and services. Discretionary means “available as needed at one’s own choice”.
So in other words you may be able to get by without it.
I mean if we are struggling to pay our bills are we really go to pay money to go on a cruise paying Royal Caribbean or Carnival?
And if gas prices are at highs are we going to choose at our discretion to go on a long road trip and stay in hotels like Hilton, Caesars and MGM ?
Or are we going to just use that money to maybe pay our mortgage? Or fill up our car so we can drive to work and keep our job….
These are the reasons that I think XLY may decline in price.
Where is XLY Year To Date pricewise?
Here is a chart showing XLY all the way back to 2009. XLY is currently trading at $163.
If we draw trend lines you can see a distinct channel where we are nearing resistance.
I like to use all of the tools at our disposal so technical analysis as well as fundamentals. We just did a video on technical analysis and chart patterns so if you haven’t seen that and want to learn more about it check it out. I’ll put a link below and a card at the end of this video that you can just click on to play it.
XLY is already up 25% YTD so far this year so I am expecting a pullback at some point.
I suspect with inflation still likely to be a challenge through the end of this year at least that XLY will not break the resistance and drop back down within the channel. If it does break resistance however, realize that the resistance line will become the new support line.
What is an option strategy that we use to profit on less consumer spending?
If we are bearish on XLY then we buy a long Put Vertical Spread which will profit with a decline in the stock price. Normally, I like to sell options which typically have a higher POP Probability of Profit.
However, when IVR Implied Volatility rating is low like it is in XLY now it makes sense to buy a Put vertical spread.
A long put vertical spread is a bearish, defined risk strategy made up of a long and short put at different strikes in the same expiration.
Directional Assumption: Bearish
Setup:
– Buy ITM Put
– Sell OTM Put
Ideal Implied Volatility Environment: Low
Max Profit: Distance Between Put Strikes – Net Debit Paid
How to Calculate Breakeven(s): Long Put Strike – Debit Paid
How do you buy a long Put Debit Spread in XLY? (I’ll show you a real example on the option trading platform)
Alright, we are going to take a look at buying a Put Debit Spread in XLY and break down the Buying Power, max loss and profit that can occur depending upon the price movement of the stock.
You can do this with any brokerage on any platform. We are going to the Tastytrade platform. Tastytrade is one of the best brokerages for trading options. It’s the one that I have used for years and they are the guys that developed TOS the Think or Swim platform and sold it to TD Ameritrade which is now Shwab and the one they still use.
Tastytrade is even better. Right now you can get cash back when you open an account.
I’ll put a link down below and if you fund with at least two thousand dollars the channel gets a small fee that really helps us out and is much appreciated. It costs you absolutely nothing and you really need to have a couple thousand at least anyway so that you can place a few different trades.
We punch in XLY in the upper left to bring up the option chains. Make sure that you are on the trade page. We click on the Oct 20 regular option chain that is 30 DTE Days to Expiration to open it up. When buying debit spreads 30 DTE is usually around where I like to be since the options are reasonably priced (as long as IVR is low) and it gives enough time for the stock to hopefully move in the direction which is your longer term outlook for the stock.
We then click on the 162 strike bid and 166 Ask to buy a $4 wide put debit spread. The max profit is the distance between the strikes $4.00 – the net debit paid which is $1.76 = $2.24. One option contract controls 100 shares so it is really $224.
The max loss is the $176 that we pay upfront when we place the trade.
This trade has a 52% POP probability of profit.
Now if we switch to the curve mode by clicking on Curve on the trade tab we can see the profit zone in green.
The breakeven is calculated by the long put strike 166 – the debit paid $1.76 = $164.24.
We hit review and send and place the trade.
How do we manage the Long Put Vertical Debit Spread?
Guys, many people do not manage Vertical Debit Spreads since they are defined risk and we know the max loss is the amount that we paid upfront when we placed the trade.
However, I am trying out a strategy that Nishant used to grow his account very quickly. Please see the link below.
How this Software Engineer Turned $2,500 into $200k with Options
I am not certain how this will work for me. However, I am trying it very small to see.
I will follow pretty closely what he did by closing winners at around 90% profit.
Plan to manage losers by closing the trade if by day 15 the trade has lost 50% of its initial value.
I will let you know how things go!!
Key Takeaways
- XLY is already up 25% YTD so far this year so there may be a pullback with inflation pressures
- The 2009 – Present day chart shows that we are near resistance technically
- The Put Vertical Debit Spread is a bearish defined risk strategy that is best used in low volatility
- Put Vertical Debit Spreads are often not managed since they are defined risk. However, I plan to manage losers by closing the trade if by day 15 the trade has lost 50% of its initial value
————————————————————–
Alright guys, I’ve put a link down below for the FREE Options Workshop. Be sure to grab that.
There is also a complete in depth course that is very reasonably priced in the link below as well as option coaching (even more reasonably priced) if you have questions and would like some feedback and/or a planning going forward.
Please leave a comment below and let me know if you are trading debit spreads at all in this low IV environment, what you are doing and if you are managing them! I appreciate your feedback.
Remember to hit like and subscribe thanks for watching please share this video with a friend and see you in the next one!