Financial ETF Enters the "Buy Zone"

May 21^st, 2021

Financial ETF Enters the “Buy Zone”

Dear Reader,

Yesterday, we looked at a Daily Price Chart of Fortinet Inc. noting the stock’s OBV line is sloping up validating the recent bullish trend.

For today’s Trade of the Day we will be looking at a Keltner Channel chart for the Financial Select Sector SPDR ETF symbol: XLF.

Before breaking down XLF’s daily Keltner Channel chart let’s first review the investment objective of the ETF.

The XLF ETF seeks investment results that correspond generally to the price and yield performance of publicly traded equity securities of companies in the Financial Select Sector Index. The index includes securities of companies from the following industries: diversified financial services; insurance; banks; capital markets; mortgage real estate investment trusts ("REITs"); consumer finance; and thrifts and mortgage finance.

Now, let’s begin to break down the Keltner Channel chart for XLF. Below is a Daily Price Chart and the three Keltner Channels for the XLF ETF.

Buy the XLF ETF

The Hughes Optioneering Team uses the Keltner Channels as an indicator to determine whether a stock/ETF is overbought or oversold. If an ETF’s daily price is trading above the upper Keltner Channel, this signals that the ETF is temporarily overbought and subject to a retracement.

Even ETFs that are in the strongest bull trends do not advance in a straight line. There are always price retracements along the way. When an ETF becomes overbought, its price will typically decline soon after as the inevitable profit taking occurs.

The XLF daily price chart shows that the ETF is in a strong price uptrend and has become overbought several times. You can see this as XLF has traded above the Upper Keltner Channel on multiple occasions recently.

But, in every scenario when XLF became overbought, the ETF soon experienced a pullback.

Finding opportunities when a stock/ETF experiences a pullback is why the Hughes Optioneering Team uses the Keltner Channels. They help us find a lower-risk entry point.

The Keltner Channel “Buy Zone” occurs when a stock is trading below the upper Keltner Channel. Once the daily price is trading below the upper channel, it provides a lower-risk buying opportunity as the stock is likely to rally.

Our initial price target for the XLF ETF is 41.00 per share.

105.4% Profit Potential for XLF Option

Now, since the XLF ETF is currently in the Keltner Channel ‘Buy Zone’, this gives us a prime opportunity to buy XLF. Let’s use the Hughes Optioneering calculator to look at the potential returns for an XLF call option purchase.

The Call Option Calculator will calculate the profit/loss potential for a call 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% increase.

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, the XLF ETF only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying stock closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if the XLF ETF is flat at 37.22 at option expiration, it will only result in a 4.7% loss for the XLF option compared to a 100% loss for an at-the-money or out-of-the-money call option.

Using the 1% Rule to select an option strike price will result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call 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 stocks.

The prices and returns represented below were calculated based on the current stock and option pricing for XLF on 5/20/2021 before commissions.

When you purchase a call option, there is no limit on the profit potential of the call if the underlying stock continues to move up in price.

For this specific call option, the calculator analysis below reveals if the XLF ETF increases 5.0% at option expiration to 39.08 (circled), the call option would make 50.3% before commission.

If the XLF ETF increases 10.0% at option expiration to 40.94 (circled), the call option would make 105.4% before commission and outperform the ETF return more 10 to 1.

The leverage provided by call options allows you to maximize potential returns on bullish ETFs.

The Hughes Optioneering Team is here to help you identify winning trades 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.

Get Chuck's Trades Sent to You!

Do you want to start receiving hand-picked trades from 10-Time Trading Champion, Chuck Hughes?

As a Trade of the Day subscriber, Chuck is offering you a special discount on his Weekly Option Alert Trading Service.

Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join and use the code "Optioneering VIP" to receive special pricing!

Wishing You the Best in Investing Success,

Chuck Huges Signature

Chuck Hughes

Editor, Trade of the Day

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Financial ETF Enters the "Buy Zone"

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