XLF Puts – An inexpensive play to the Downside

Breakdown: I bought the XLF ($12.85) October 13 Puts Friday for $.72.

Profitable – I make money on this trade if XLF closes under $12.28 by October 21, 2011.

Breakeven – If XLF closes at $12.28 by October expiration.

Unprofitable – If XLF closes above $13 I can only lose the maximum amount I bought these puts for, $.72.

The reason I like this trade: I think the stock market and most stocks are in a trading range. When we are in a range, its easy, try to buy low and sell high. I think the XLF is at the high-end of the $11.50 to $13 range and it is currently trading $12.85. I want to get short the XLF. There is a chance we could extend this rally further, but I think we will sell-off to the bottom side of the range. So, I bought the XLF October 13 Puts. Also, the volatility is relatively cheap and with the VIX approaching 30, I would rather be a buyer than seller of options. Please comment here or e-mail me with any questions about this trade.


Andrew R. Keene