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The following article will take a look at a combination of fundamental market analysis in combination with historical analysis to determine potential positions on three leading market ETFs: SPDR S&P 500 (SPY), iShares Barclays Treasury (TLT), and SPDR Select Energy (XLE). In the article, we will look at how each ETF has performed from August options expiration to October options expiration to determine any seasonal patterns. In addition to that, we will look at key fundamental information to determine if the ETF is currently a solid trade/investment. From there, we will use that information to craft positions for each ETF.

Daily Data: SPDR S&P 500

With the market pending QE3 it seemed obvious to take a look at SPY and its August to October option expiration date returns for the past 10 years.

Above you see many single digit returns followed by a large sell-off in 2008. Well August to October 2008 was the great sell-off just before the bailout proposal in November. If we look at these returns excluding -28% in 2008 then the market seems much less volatile during this period. Without 2008 I get a max low of $135.79 for October. When I looked up option premiums on SPY I found great values so I'm going to suggest two trades which we may enter soon.

(click to enlarge)

Option Trade 1: SPY - Sell Oct'19 135/134 put spread (Bull Put Spread)

(Sell 135 Put/Buy 134 Put)

Size - 5% of Option Spread Portfolio Size = (5 spreads)

Entry: Sell Limit: 0.20

Stop Loss: 0.45

Exit Price: 0.00

Max Return: 25%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

This 135/134 bull put spread is basically trading the estimated max low excluding 2008. However, if you're a worried about the market going forward than I suggest the trade below

Option Trade 2: SPY - Sell Oct'19 130/129 put spread (Bull Put Spread)

(Sell 130 Put/Buy 129 Put)

Size - 5% of Option Spread Portfolio Size = (5 spreads)

Entry: Sell Limit: 0.10

Stop Loss: 0.23

Exit Price: 0.00

Max Return: 11%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Daily Data: iShares Barclays 20+ Year Treasury Bond

I'm not an expert bond trader however, I know that if the Fed is looking to continue stimulus and improve the US economy they will probably keep interest rates low. This means the bond price bubble is due to continue its trend up as long as the Fed continues to speak about stimulating the economy and backing its bonds with printed money. This means we should seriously consider trades on TLT or TBT. However, before I knew about the Fed preparing another stimulus plan I looked up the August to October option expiration date returns since 2002 and was impressed with the returns.

Above you see that the returns have mostly been positive for 8/10 years. The largest decline in TLT was in 2010 which was only -5%. Given my risk tolerance these are the types of max declines/number of positive returns I like to look for. Based on a close of $121.60 on August'17 I estimated a max low of $115.75 on October'19 if TLT were to sell off again by -5%. Of course TLT could sell off by a larger amount.

The risk with TLT is that the bond bubble bursts and investors sell bonds either because they deem equities to have a better risk reward or because they believe the assets held are too risky. TLT holds 20year US treasury bonds which is arguably the safest investment product in the world.

Based on the information above we entered the following trade today.

(click to enlarge)

Option Trade: TLT - Sell Oct'19 115/114 put spread (Bull Put Spread)

(Sell 115 Put/Buy 114 Put)

Size - 7% of Option Spread Portfolio Size = (7 spreads)

Entry: Sell Limit: 0.09 (my entry: 0.10)

Stop Loss: X

Exit Price: 0.00

Max Return: 11.11%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Note: The Oct'19 TBT 17/18 bear call spread is currently not a good risk reward spread right now. The bear call spread is only paying 0.14 for a trade that is nearly at the money relative to where TBT closed at on Aug'17 ($16.45).

Daily Data: Energy Select Sector SPDR

Oil inventories showed a surprise decline on Wednesday causing crude to remain in its short term uptrend since the end of June. After seeing this low inventory report I decided to look at how integrated oil stocks trade during the August to October option expiration period.

Given how SPY handled so well during this period (excluding 2008) I expected to see similar returns in XLE. Above you see one large negative return in 2008 due to the Fall-2008 sell-off. However, if we exclude 2008 we see that XLE is roughly neutral to bullish during this period. Note if we exclude the worst return (-35%) I get an estimated max low of $68.94 for October'19th. I do not mean to intentionally overlook the 2008 return, it just seems a large correction like that year only happen on rare occasion.

Based on the information above I suggest the following trade:

(click to enlarge)

Option Trade 1: XLE - Sell Oct'19 68/67 put spread (Bull Put Spread)

(Sell 68 Put/Buy 67 Put)

Size - 4% of Option Spread Portfolio Size = (4 spreads)

Entry: Sell Limit: 0.21

Stop Loss: 0.45

Exit Price: 0.00

Max Return: 26.58%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin.)

Disclosure: I do not own any investments in SPY, TLT, or XLE. I own short calendar/vertical spreads on GLL (I'm short GLL). I'm short SCO, GLL, and ZSL,. I'm long AAPL.

I may insert footnotes to show my references for certain information.

Charts and fundamental data come from Finviz.com and Tradingeconomics.com

News from: www.theflyonthewall.com.

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Source: How To Trade 3 Leading ETFs Through October