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Straddle Update for XBD.X

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Last Friday I set up a straddle trade on the Securities Broker/Dealer Index (XBD.X) near the 520 level (see archive for 10:30 EST on PremierMarkets.com). I thought the XBD.X was at a pivot point and a sharp break (up or down) was about to take place. The technicals were mixed, as a break either way from the 520 level had me thinking that bears could either rush in to cover or a break down would have bulls selling the rally. Almost like clockwork the break came and the puts paid. On April 20th (see 03:30 Update) we went back over the trade once again and set a target for the downside at 480 where a straddle trader would look to take his/her profit in the trade. Today, the XBD.X has jumped back very close to the exact position we had alerted to a straddle position. With this index trading just below the bearish resistance line I'd be thinking this....

For the straddle trader still holding the call, he/she might simply buy the put they sold yesterday near $480 for a profit back here at 512 (thus straddled again.) Same risk as before. The risk is that the XBD doesn't move before expiration.

Sell the 520 call they're still holding at current levels for a small loss (more than made up for in the profit from the puts). All risk is eliminated from account as no position is held.

Hold the call and see if the XBD.X can't break through bearish resistance and give double top buy signal at $535. You could always look at your account, see what profit was taken from the put contract and use that profit or a portion of it as a level to set your stop. For example, if you had a $500 gain from the put option, you could simply calculate at what point you would realize a $500 loss from the call if the XBD.X were to trade lower. That would be your stopping point. Since our goal is to make money with every trade, you could also calculate out at what point you'd realize a $250 loss from the call and have that be your stopping point. Then at a minimum you walk away from trade with a $250 gain.

Broker/Dealer Chart - $5 box

With the XBD.X still trading under its bearish resistance line, I'd be more inclined to at least get back on the straddle trade at this point. If the XBD.X is able to trade above $535, I could then sell the put for a small loss and hold that call. If the XBD wants to swing 40 points to the downside from our "pivot point" then it might want to swing that distance to the upside. We've also pointed out that the longer-term bullish price objective for the XBD is currently 620. We had originally highlighted the June 520 strike. Calls (XBEFD) and puts (XBERD). I'd also be using this information to help me trade some other brokerage stocks. In today's "hot list" we used it to day trade shares of Merrill Lynch (NYSE:MER) for a nice gain.

Jeff Bailey
Senior Market Technician

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