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Cracking open ETFs

Let’s talk about the ETF to individual stock connection. Probably the easiest way to go about this is by using a favorite analogy of mine: the boats and tide analogy.

If you’re not familiar with the boats and tide analogy, the tide raises and lowers the boats. That’s what I mean when I talk about the interconnectivity between heavily weighted stocks and the ETF sectors that they’re involved in.

This is what I call that pre-curated watchlist that guarantees validity, attention, and to some extent volume because this is where ETFs have an impact on the individual stocks as well as the broader markets.

Let’s take a look at the XLU…

Looking At XLU:

The XLU is a great place to look when it seems like everything’s just burning down… like what we saw through the week of October 26th.

So I’ll look to the XLU because it’s a terrific defensive that holds its own. What do I mean by “it holds its own”? That it can maintain a certain degree of bullish directional bias. How can I tell that? From the wave trade flag that appeared on the chart, as well as, the 8:13:21 flag.

The rest of this newsletter will continue with that same narrative, Gang.

The narrative that we’re referring to the week of October 26th, so be sure to pay attention to the dates, as they’ll matter.

So when looking at the chart we can see on October 28th a pullback. So I know XLU is essentially going on sale because I know it’s a valuable thing because of the double green, uptrend candles. I do want to be a buyer in this case.

This is often measured and mentioned as “buy the dip.”

So the 62 calls which would be at the money, inside the wave, we’re going for $1.70 to $1.90 on October 28th. That’s a very reasonable place to have picked up the XLU 62 calls for the expiration of November 20th. Now on October 29th, they were back in favor. Now those same 62 strike calls were then trading for $2.25. That’s roughly 60 cents to about 80 cents in terms of gains, in less than a day.

The fact that these November 20th expiration calls still have room to continue higher without a severe amount of time decay can give you the opportunity to jump in and see where they go.

Time decay is inevitable when you buy a depreciating asset like options as it gets closer and closer to expiration, so it’s good to have time prior to expiration before time decay becomes a bigger problem for your trade.

So that’s the XLU (ETF) as a whole… but that’s only the tip of the iceberg.

What’s happening underneath?

From ETF To Individual Stock:

When I pulled up the charts for all the stocks within XLU, there were a few that immediately stood out to me with double green candles on their charts. One of them was SO.

Why SO?

It’s slightly less heavily weighted, has great structure, and it’s a very inexpensive option to pick up. I’m going to compare some dates here because I’m focusing a lot on time with this. If you’re interested in knowing more, I’m planning on covering that during my “ETF Master Class” on November 7th.

You can join me here.

The timing with which you execute a long call, credit spread, debit spread, etc is crucial. But really HOW much does it matter? Well let me walk you through it right now…

On October 27th when the market was pulling back a little bit but up near the highs, those 57 calls (which is still generous because in the wave really would’ve been around 60 on the 27th) was trading for $3.65. On the 28th boom… those 57 calls were trading for $2.45. Then on the 29th they were back to $3.10.

What’s The Point Here?

Don’t fall victim to buying those green candles at the top near the highs when it’s starting to pullback.

You want to wait for a retracement. Once you have the retracement and you’re sitting inside the zone, you’re able to scoop them up for less, have better positioning on the chart, and  you can ride that wave back up.

So instead of buying those calls at $3.65… you grab them at $2.45, and then within one session you’re already looking at a gain from $2.45 to $3.10. All because you were able to be patient and wait for momentum, while getting the timing right, and waiting for a good retracement to focus on a strike within the wave (within the zone of support within that double green uptrend).

This is a great example of how you’re able to use these pre-curated watchlists provided by ETFs and focus on some of those heavily weighted stocks within those ETFs. The best part? 

None of these options cost more than $3. Trading this way provides a fantastic way to maintain risk control within your account.

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