Book Some Gains and Go Back to the Well

The first order of business is to sell our XLF March $21 Calls (XLF160318C00021000) and XLU March $46 Puts (XLU160318P00046000). We expect to book a profit of 45% on the XLF trade and a 20% gain on the XLU trade. We are taking the gains while we can as the stock market is reaching our near-term upside targets and the time decay begins to work against us. We still, however, will continue to hold our March GDX puts. The momentum behind gold has waned a bit, so we still expect GDX to pull back into the $17 range before the March 18 expiration.

Today, we will be entering into to several new trades. Some of these options strategies will be new to you but we will explain in detail how to implement them. Let’s start with our short-term market views. Tom and I believe that a low in treasury yields is near and the yields will be rising as the “safe-haven” trade of owning these bonds unwinds. Investors bid up bonds as stocks tumbled early this year and held a perception that the Federal Reserve would put interest rate hikes on hold indefinitely. Now that there is a sense of calm in the equity markets and the Fed still looks to be on track to raise interest rates again, we should have a profit opportunity with a potential rise in rates.

Buy April $128 puts on iShares 20+ Year Treasury Bond (TLT160415P00128000), currently priced at $2.32. These optiuons expire April 15.

Our next trade revolves around oil. There will be multiple ways to participate on our premise that oil has found a short-term bottom and will continue to rise towards $40. It currently is priced at $33. We are anticipating that oil will continue to rebound and, at the very least, it has found a floor. Sentiment is still extremely negative but the price structure of oil suggests that there is more room on the upside.

Let’s once again enter into the exchange-traded fund, United States Oil (USO). Buy USO at market when you receive this email.

We also want to use an option strategy that has two legs with this ETF trade. We are advising you to buy June USO calls and SELL a put option on USO as well. This two-part trade is commonly referred to as a risk reversal or collar trade. Here’s how you will enter this two-legged trade with your broker.

Buy USO June $9.00 call options (USO160617C00009000), which are currently trading at $1.19 and expire June 17. If you purchase 10 contracts it would cost you $1,190 for this trade.

We are adding a new leg to this trade and are advising you to SELL USO June $8.00 put options (USO160617P00008000), which expire June 17. For this trade on 10 contracts, you will receive about $500 immediately as premium or income. But you are obligated to purchase 1,000 shares of USO at $800 if the price falls to this level near or at the June expiration. Given our view, the combination of these two legs allows us to get into the trade at a cheaper total cost and, at worst, we are forced to buy USO at a price that still gives us tremendous upside.

Finally, we are also adding an equity trade that will rise if oil does well.

We are advising the purchase of the Market Vectors Russia ETF (RSX). This Russia ETF has just broken out of its trading range.

Finally, to complement the ETF trade, we want you to purchase an option on RSX.

Buy RSX May $16 call options (RSX160520C00016000), which are currently priced at $0.71 and expire May 20.