A bearish options bet that capitalizes on a double-top forming in this high-flying sector

Published Wed, Feb 21 202410:31 AM EST

Nishant Pant @TheMeanTrader @TheMeanTrader

Growth sectors have experienced a remarkable rally since November 2023, with tech , financials , industrials , health care and consumer discretionary leading the charge. Consumer discretionary's stunning 23% jump between November and December highlights this powerful momentum. A closer look at the 1-year daily chart of the Consumer Discretionary Select Sector (XLY) reveals the formation of a double top pattern. Although previous highs can be surpassed, a declining relative strength index while retesting those highs signals a potential weakening of upward momentum. This technical pattern, combined with a similar occurrence in August 2023, suggests the possibility of an impending reversal. The trade setup: A bear put spread With a bearish directional bias in place, all I need to do is find a trade structure that will allow me to bet on a downward move in XLY. The trade structure I am going to use here is called a "bear put spread," also known as a "put debit spread". XLY is a highly liquid ETF, and if you look at its option chain, you will notice it offers $1 wide strikes. This is great because this allows me to construct a $1 wide put spread and risk as little as $50 to make $50 per winning trade. To increase risk, simply add more contracts. For example: Doing a 100 contract trade would risk $5000 to make $5000. All I need is for XLY to drop by $1 by expiration date for this trade to double my money. Here is the exact trade setup: Buy $177 put March 8 expiry Sell $176 put March 8 expiry Limit Price: 50 cents Profit target: If XLY is trading at $176 or below on expiration date, this trade will generate a 100% return on investment on the amount risked. Managing losses: An important part of any profitable trading system is it needs to have positive expectancy. That means the winners need to add up to more than the losers. For me to create positive expectancy with this trading strategy, I will close this trade if I lose 50% of my investment (i.e. 25c). By doing this, every winner will cancel out two losing trades. DISCLAIMER: Nishant currently has a 177-176 bear put spread on XLY expiring on 3/8/2024 -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.