DailyPlay – Opening Trade (XLC) – June 30, 2022

Bearish Opening Trade Signal

View XLC Trade

Strategy Details

Strategy: Short Call Vertical Spread

Direction: Bearish

Details: Sell to Open 5 Contracts Aug 5, 2022 $55/$61 Call Verticals @ $1.80 Credit.

Total Risk: This trade has a max risk of $2,100 (5 Contracts x $420 per contract).

Trend Continuation Signal: This is a Bearish trade on an ETF that is experiencing a bearish trend. 

1M/6M Trends: Bearish/Bearish

Technical Score: 3/10

OptionsPlay Score: 98

Entering the Trade

Use the following details to enter the trade on your trading platform. Please note that if there is a multi-leg option strategy, it should be entered as a single trade. 

Please note these prices are based on the previous day’s closing prices. Should the underlying move significantly during the pre-market hours, we will likely adjust the strikes and prices to reflect a more accurate trade entry. This will be reflected in the Portfolio tab within the OptionsPlay platform.

Investment Rationale

One thing I notice that is very much contributing to some of the large and seemingly unexplained intraday moves in the equity markets is that liquidity has dramatically dropped from when stocks were in bull mode (like they were for all of 2021).  It’s easiest to see this in the S&P futures, where what were “standard” size bids and offers were often multiple hundreds of contracts at every single tick. Nowadays, we’re seeing dozens (or even smaller amounts) as the norm, and it accounts for why we constantly see 5-minute 20-point moves. There’s just nothing there to absorb any real size order.

I’m fairly sure that the bulk of the trading done is now even more so by computer vs. computer, and that much of the public and institutional community has greatly diminished their daily participation – more so managing overall portfolio construction and far less so trading for short-term moves.  And virtually everyone I talk to is telling me the same thing: “You can’t beat this game right now, so I’m not even gonna try”. I hear something like that a few times a day.

Which leads me to today’s Daily Play – an idea that’s more so about playing the overall downward trend of this security, and less so about trying to guess the day-to-day movement. Let’s look at the chart of the Communication Services SPDR ETF (XLC). Its biggest components are META and GOOG/GOOGL, and combined they comprise 40% of this ETF. We see that on its entire move down from all-time highs some 14 months ago, it has yet to even make a weekly Setup -9 count, let alone a more terminal -13 count. I’m apt to think it won’t make its true bottom without at least doing the former, and with it already trading under its 62% Fibonacci retracement, it might finally do one over the next five weeks.

XLC – Weekly

As such, let’s look to sell an August 5th $55/$61 call spread, which closed yesterday at $1.825 mid. (I’m using the $61 strike because that is the high of Setup bar -1, which in theory would be where the TDST Line resistance would be at if this completes the current downward count in early August.) We’d be collecting about 30% of the spread differential, and the spread expires in 37 days, in line with the potential for another 5 weeks of mostly negative price action to reach the Setup -9.