XLU Underpriced Bullish Call Spread has Profit Potential of 43%

24 April 2024, 12:11 PM

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By Dmitry Pargamanik

How this XLU Bull Call Spread Works

The bottom of the XLU trade card shows us that we would buy one call and sell another with the same 17-May-24 expiration (this is a bull call spread as indicated on the top of the card).

Buy: 17-May-24 65.5 CALL

Sell: 17-May-24 66 CALL

Reasons to Like This Trade

  • You can buy this spread for $0.35 when theoretically it’s worth $0.36. Simply put, the market is implying a theoretical edge of 3.4%.
  • Your maximum gain is $0.15, which means you can make an astounding 42.9% return on your investment in 18 trading days! (That's if the stock closes at 66 or above. $0.15 / $0.35 = 42.9%) At the time of this alert, the stock was trading at 66.40.
  • The stock only needs to close at, or above, 66.00 after 18 trading days for you to realize this maximum return. Since the stock is already above your ideal price of 66.00, you have a cushion in the strategy. The stock can decline by -0.8% and you'll still break even. If the stock stays here or goes higher you will make your max gain.
  • 5 out of 7 indicators are pointing to a bullish sentiment in the stock, which is enough to believe there is a decent chance the stock price could hit its mark of 66.00. Look, nobody knows for sure if the stock is going to go up or down, but, if you had to handicap the stock price, these metrics are indicating that XLU is really riding the momentum of bullish signals.
    Metric Signal Bull or Bear
    Relative Performance 1-yr Underperform Bearish
    Relative Performance 3-Mon Outperform Bullish XLU Bullish Relative Performance 3 Month
    Relative Performance 2-Wk Outperform Bullish XLU Bullish Relative Performance 2 Week
    Seasonality Weak Bearish
    Technical Bullish Crossover Bullish XLU Bullish Technical Indicator
    Historical Price Action 62% Uptrend Bullish XLU Bullish Historical Price Action
    Option Order Flow Sentiment Positive Net Option Delta Bullish XLU Bullish Option Order Flow Sentiment

Conclusion

This trade in XLU looks like a good opportunity because:

  1. 5 out of 7 bullish indicators support positive momentum
  2. 42.9% potential return on your investment
  3. Theoretical edge of 3.4%
  4. The stock price is already at the price point for you to make your max gain and can even go down by -0.8% and you'll still break even!

Don't Let an Opportunity Pass You By!


How to Find More XLU Bull Call Spread Strategies

How you can find bull call spread trade ideas for other stocks


And if you want to find more bull call spreads for other stocks, go to the bull call spread screener


Relative Performance

XLU stock has underperformed the market in the last year with a return of -1.4%, while SPY returned +23.9%. This shows that you would have done better investing in the overall market (through SPY) over the last year than in XLU shares. However, XLU has outperformed the market in the last 3 month and 2 week periods, returning +10.2% and +0.8%, while SPY returned +4.3% and -3.0%, respectively. This indicates XLU has been having a stronger performance recently.

Learn about a stocks relative strength


Seasonality: Weak

The strategy involves holding the position from Apr 24 to May 17 expiration. Historically, this has been a weak seasonal period. In the past 12 years, XLU shares have decreased 75% of the time between Apr 24 to May 17, while averaging a return of -1.5%. Learn how to look up stock seasonality.

Technical: Bullish Crossover

The stock has been on a downtrend and the short term moving average (20day) made a bullish crossover. Can be the beginning of a trend reversal.

Historical Price Action: 62% Uptrend

In the last 4 years, there were 29 historical samples of XLU stock price movements over the same time period as this option spread. The stock moved up 62% of the time for an average return of +3.1%.

How to generate statistics on a stocks historical price return distribution

Option Order Flow Sentiment: Positive Net Option Delta

At the time of this XLU trade idea, bullish option order flow exceeded bearish option order flow. The net option delta volume was 61 K.

Learn more about option delta volume.

Find out the latest sentiment from the options market for XLU

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How to Screen for the Best Bull Call Spread


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About the Publisher - Marketchameleon.com:


Marketchameleon is a comprehensive financial research and analysis website specializing in stock and options markets. We leverage extensive data, models, and analytics to provide valuable insights into these markets. Our primary goal is to assist traders in identifying potential market developments and assessing potential risks and rewards.



NOTE: Stock and option trading involves risk that may not be suitable for all investors. Examples contained within this report are simulated and may have limitations. Average returns and occurrences are calculated from snapshots of market mid-point prices and were not actually executed, so they do not reflect actual trades, fees, or execution costs. This report is for informational purposes only, and is not intended to be a recommendation to buy or sell any security. Neither Market Chameleon nor any other party makes warranties regarding results from its usage. Past performance does not guarantee future results. Please consult a financial advisor before executing any trades. You can read more about option risks and characteristics at theocc.com.


The information is provided for informational purposes only and should not be construed as investment advice. All stock price information is provided and transmitted as received from independent third-party data sources. The Information should only be used as a starting point for doing additional independent research in order to allow you to form your own opinion regarding investments and trading strategies. The Company does not guarantee the accuracy, completeness or timeliness of the Information.