Kimble Charts: Utilities

Kimble Charts: Utilities

By Ilene

Chris Kimble shared his chart of the Utilities Select Sector SPDR ETF, XLU, with us.

The one month performance inset shows XLU’s uninspiring performance compared to every other ETF on the list. However, the rather steep bullish falling wedge pattern says that it may be time for a bounce.

[Click on chart to enlarge]

Chris likes XLU for a short-term bounce off the 200 day moving average at $44. One way to play this setup is to buy the XLU outright. Chris suggests a 3% stop loss on the shares.

Another bullish play is to use options in a strategy designed by Phil:

1. Buy the XLU June $42 call for $2.85 and sell the June $45 call for $1.10 for net $1.75 on the $3 spread.

2. Sell the January 2016 $39 put for $1.35 to drop the net cost of the spread down to $0.40. The spread has a potential $2.60 upside ($3 minus the cost of $0.40) — i.e., XLU holds $45 through June 19, 2015, we’d collect $3 back on the spread which cost $0.40 (including the $1.35 we collected for selling the put). If XLU then holds $39 through January, 2016, the short put will expire worthless and our profit will be $2.60 on cash (650%). (Note: on the call spread for June 19, 2015, the best case result is $3 per share if XLU is $45 or higher on expiration. The worst case scenario plays out if XLU $42 or below on expiration, in which case the call spread would have no value.)

If 10 June $42 calls are bought, 10 June $45 calls are sold, and 10 Jan. 16 $39 puts are sold, the downside is the obligation to own 1000 shares of XLU (which pays a 3% dividend) at net cost of $39.40 (11% off the current price of about $44.30) if XLU is below $39 in January 2016. That position can also be rolled or adjusted.

According to ThinkOrSwim, the net margin for selling 10 puts for $1,350 is just $2,690 plus the $1,750 cash needed for the spread means laying out $4,440 of cash plus margin to make up to $2,600 (58.8%) by January expiration.

For free alerts from Chris on other interesting chart patterns, visit his website and sign up at the top right.