The iShares Transportation Average ETF (IYT) is a price-weighted ETF dominated by rail, truck and freight companies. The top 10 holdings comprise 77% of the ETF, with nearly half coming from four railroad companies – Kansas City Southern, Norfolk Southern, Union Pacific, and CSX. Other well-known names in the top 10 are FedEx and UPS.
The transportation sector has been hot since bottoming in March 2020, as evidenced by IYT’s over 130% growth. The ETF hit a record high a month ago but is down 4% last month as rising fuel prices (crude oil hit a two-year high this week) weighed on earnings. However, the general uptrend is intact, led by the IYT 50-day moving average. The steady rise in the trendline has barely changed during IYT’s recent sideways move. More importantly, IYT has not closed a single day under the 50 days since February 3rd. But now the trend line is being tested as IYT is only one percent above this support.
We are counting on this support position and that the long rally will continue. The short strike of our credit spread is below the 50-day rate, so holding on to this trendline would keep our spread out of the money.
If you’re okay with IYT staying above its 50-day moving average, consider the following trade, which depends on the stock staying above 265 to expire in six weeks.
Buy to Open IYT 16Jul 260 Put (IYT210716P260)
Sell to Open IYT 16Jul 265 Put (IYT210716P265) for $ 1.45 Loan (Sell a Vertical)
This loan is $ 0.03 less than the midpoint of the options spread when IYT was trading above $ 270. Unless the ETF recovers quickly from here, you should be able to get close to that amount.
Your commission on this trade is only $ 1.30 per spread. Each spread would then bring in $ 143.70. This trade reduces your purchasing power by $ 500 and your net investment is $ 356.3 ($ 500 – $ 143.70). If IYT closes above $ 265 on July 16, both options will expire worthless and your return on the spread will be 40% ($ 143.70 / $ 356.30).
This entry was posted on Monday, June 7th, 2021 at 8:33 pm and is filed under Uncategorized.