With markets looking a little volatile this morning, we're going to look at a bull put spread on a low-beta ETF today — the S&P 500 Utilities Sector ETF.
This ETF has a beta of just 0.52, so should be a lot less volatile than the general market.
XLU is above the 200-day moving average and is holding just above the 21-day exponential moving average.
Traders who are willing to bet that XLU stock will stay above 68 for the next few months could look at a bull put spread trade.
As a reminder, a bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance.
Trade Works With Multiple Scenarios
This type of trade will profit if XLU stock trades sideways or higher, and even sometimes if it trades slightly lower.
With the ETF trading around 70, if we use the Sept. 20 expiration, we can sell a 68 put and buy a 63 put for around $0.65 a share. Selling this spread would generate roughly $65 in premium for a block of 100 shares, with a maximum risk of $435.
If the spread expires worthless, that would be a 14.95% return in 65 days. That's provided the utility ETF is above 68 at expiration.
The maximum loss would occur if XLU stock closes below 63 on Sept. 19. That would see the premium seller lose $435 on the trade.
The break-even point for the trade is 67.35. It's calculated as 68 less the $0.65 option premium per contract.
Exit Strategy For XLU Stock Trade
I would set a stop loss if the loss is equal to twice the amount of premium received. In this case, that would be $130.
Sticking to this stop loss level will help avoid large losses if the trade goes south.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
