An Option Strategy For A Pullback In SPDR Select Technology Fund

| About: Technology Select (XLK)
This article is now exclusive for PRO subscribers.

The SPDR Select Technology Fund (NYSEARCA:XLK) is an exchange-traded fund that is non-diversified. This technology fund was launched in December 16, 1998 and mainly invests in computers, telecommunications, internet software and electronics.

Just like investing in a stock, there are advantages and disadvantages to investing in an Exchange Traded Funds. Advantages include exposure to a group of equities and the ability to manage risk by using options. Some disadvantages include investors are limited to larger companies, larger bid-ask spreads and averaged out dividend yields. Here's a break-down of SPDR Select Fund Technology's top ten holdings as a percentage of SPDR Select Fund Technology's assets.

Overall Portfolio Composition

  • Stocks: 99.76%
  • Bonds: 0.00%

Top 10 Holdings (65.18% of Total Assets)

Company Symbol % Assets
Apple Inc. AAPL 14.96
International Business Machines IBM 8.61
Microsoft Corporation MSFT 7.72
AT&T Inc. T 7.12
Google Inc. GOOG 6.48
Verizon Communications Inc. Com VZ 4.54
Intel Corporation INTC 4.18
Oracle Corporation ORCL 4.03
Cisco Systems, Inc. CSCO 3.86
QUALCOMM Incorporated QCOM 3.68

If investors were buyers of the SPDR Select Technology Fund at the beginning of the year, the current year to date performance of the SPDR Select Technology Fund is up about 5% Currently, only Google and Verizon are down year to date. Out of the ten companies listed above only four have not reported earnings yet (Apple, Cisco, AT&T and Qualcomm). If investors believe that Apple, Cisco and Qualcomm can lift the fund higher through their upcoming earnings then you still may have time for a strategy on the bullish side. However, when technically looking at the SPDR Select Technology Fund on a one year chart investors will see the $27 level as resistance.

When looking at the chart on a one year time horizon, investors will notice that every time the SPDR Select Technology Fund approaches the $27 level there is a pullback. While I'm still bullish on tech in the in the longer term, I believe in the short term investors might see a pullback in tech, now that most of the SPDR Select Technology Funds stocks have reported earnings. Some of my reasons for seeing a pullback in the SPDR Select Technology Fund are:

  • If positive earnings are not enough as a catalyst in the short term to drive the SPDR Select Technology Fund through $27, then investors might see a healthy pullback.
  • General market correction in the Dow and S&P 500.
  • Further European debt concerns.
  • Seeing a market shift out of tech and into other sectors.

The Trade:

If investors believe that the SPDR Select Technology Fund will not break through the $27 level in the short term, investors could look at buying the March 27 or 28 strikes. The March $28 strike is currently going for $1.46 and your breakeven cost would be (28-1.46=26.54) now take the current stock price of 26.84-26.54=0.30 cents downward slide to breakeven. Investors could also use the 27 strike, but investors breakeven will be larger.

I picked March since June is the next month investors can look at investing in options and in the long term I like the fundamentals of technology stocks, but in the short term I'm looking for a pullback. If investors are not sure about this trade, I would wait until Apple, Cisco and Qualcomm report earnings and see if the SPDR Select Technology Fund breaks through the $27 level. Good luck on this directional trade, and thanks for reading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in XLK over the next 72 hours.