On CNBC’s “Fast Money”, Carter Worth shared his bullish view on the health care sector. He said that the sector is finally reaching new highs, after two years of weak performance and he thinks that it’s going to trade even higher.
As you know, Worth is one of my favorite technicians and I generally pay attention to his calls. His argument is that the Health Care ETF, XLV has been lagging the biotech ETF, IBB and is due to play catch up.
One trading opportunity for those traders with a bullish bias is a Bull Put Spread. Traders willing to bet that the stock will stay above $79, could use the $79 strike as the short put and the $77 strike as the long put.
As of Wednesday’s close, this trade offered a roughly 37% return on risk over the next 58 calendar days when using the August 18th expiry.
The maximum profit on the trade would be $54 per contract with a maximum risk of $146.
The spread would achieve the maximum 37% profit if XLV closes above $79 on August 18th in which case the entire spread would expire worthless allowing the premium seller to keep the $54 option premium.
The maximum loss would occur if XLVcloses below $77 on August 18th which would see the premium seller lose $146 on the trade.
The breakeven point for the Bull Put Spread is $78.46 which is calculated as $79 less the $0.54 option premium per contract. Keep in mind that due to the bid-ask spread, you may not be able to get filled at these prices.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
