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[Options] Taking a Shot at the Financials

May 6, 2020

The broader markets are starting to show signs that we may be setting up for some sideways-to-down chop.

And one sector that is likely giving investors fits is the financials. During this recent "recovery," $XLF has continually been underperforming relative to the S&P. JC shared this chart today highlighting this observation:

It's tough to be bullish stocks overall when you see financials underperforming like this. They simply are too important to the economy. But I'll leave that debate to the fundamentalistas.

I think right now there's a good opportunity to take a tactical shot getting short $XLF with long puts. I generally don't purchase naked long puts, but in the interest of keeping my life simple and observing some "cheap" premiums in June puts, I like the idea of getting into a highly leveraged play that just needs a little bit of juice to drive potential profits.

Here's the Play:

I'm buying a HALF position in long $XLF June 17 puts for a 23 cents debit. This is an aggressive bet and it is a long-shot that the puts will ever even go in-the-money. But I don't necessarily need that to happen.

If the broader markets show any inkling of attempting to "retest the lows," it is likely financials will lead the way. And if that happens, not only will we benefit from the directional move, but volatility will likely rise in these OTM puts -- such that we'll have a good chance of at least doubling our money.

So my plan is to sell half of my position at a double, and then aggressively manage the rest, closing on any break of near-term resistance.

As far as risk management goes, I am deliberately only risking half as much capital as I typically would in a trade. And I fully expect these puts to go out worthless if we don't see any downside action soon. I'm accepting that risk up front.

~ @chicagosean

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