Sector Watchlist (Actionable)
Paper trade ideas on Real Estate and Health Care Sector
As the markets continue their choppy price action, a.k.a., whipsaw up and down, I am using my time to go back to some basics. One of those basics is to do a top down sector analysis in terms of trend. As they say, the trend is your friend.
Most sectors are in a bearish trend. The below is my take on how to identify trade opportunities and choose potential strategies on two sectors. Use the same methodology on the other sectors…
The real estate sector (like most other sectors) had a strong move down during the latest market selloff. In my opinion, it is now in a low base, a price action pattern that will have pops that get sold off until it breaks out one direction or the other. I don’t think it will break out to the upside anytime soon, especially if previous support near $41 becomes resistance.
I want to find any components of XLRE that have similar to bearish set ups to see if there are any high probability, low risk set ups for option trades. The best I could find was PLD, PSA, SPG, and WELL. Each are interesting as they have a similar low base. Any pop to the top of that base provides a very interesting set up for a vega neutral Bear Call Credit Spread. My favorite is WELL (and I regret not seeing this on Tuesday)…
If WELL were to pop up to the $80 range on Wednesday, I would be very interested in selling a WELL Jul15 $75/$80 Bear Call Credit Spread, especially if I could get around $3.50 credit on $1.50 risk. Then just wait for it to head back down to the lower end of the base, and either hold for a potential breakout lower or adjust to an iron butterfly by selling WELL Jul15 $75/70 Bull Put Credit Spreads (putting me into a zero risk play).
The healthcare sector has a similar structure as real estate. In my opinion, I also don’t see it breaking to the upside anytime soon. It may pop temporarily, but it is likely to see previous support as resistance.
Note that I am currently long GILD calls per this alert. They are already at 50% ROI - I plan on selling on any continuation pop on Wednesday.
I am interesting in the following healthcare names for either gamma neutral Bear Call Credit Spreads or sideways to bearish calendars (or diagonals): JNJ, PFE, ABBV, and MRK. The best credit spread set up is JNJ. I also find PFE an intriguing calendar set up.
JNJ has already popped up to previous support/resistance. If it touches the daily 20 eMA around $174 on Wednesday, I would consider a JNJ Jul15 $175/180 Bear Call Credit Spread.
PFE is in the middle of no mans land with ER coming up in July. This is my favorite kind of pre-ER set up.
Of interest is a calendar option strategy whereby the short expiry is before ER and the long expiry is following ER. If PFE closes up on Wednesday, I will consider a PFE Jul15 / Jul29 $48 put calendar. Ideally, the short Jul15 $48 put would expire worthless and I could consider holding or adjusting the long Jul29 $48 put heading into ER.
For all of the above opportunities, I’ll be considering a $250 position size.
As always, plan your trades and trade your plans. Please do your own due diligence!