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Consumer Staples Options Are Expensive While Discretionary & Consumer Tech Are Cheap! Takeaway: Buy The Dip!

May 24, 2019

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

Implied Volatility Data of S&P 500 Sector ETFs

Name Ticker 30-Day
Implied Volatility
90-Day
Implied Volatility
30-Day
Percentile
90-Day
Percentile
30-Day Percentile
for Implied-Realized Spread
90-Day Percentile
for Implied-Realized Spread
Utilities Select Sector SPDR Fund XLU 12.42 11.94 26.39% 0.40% 43.25% 78.97%
Real Estate Select Sector SPDR Fund XLRE 13.54 13.15 53.57% 49.60% 61.51% 67.46%
Consumer Staples Select Sector SPDR Fund XLP 13.63 12.64 76.59% 58.73% 77.78% 96.83%
Industrial Select Sector SPDR Fund XLI 19.04 18.1 75.79% 75.60% 62.30% 88.49%
Materials Select Sector SPDR Fund XLB 19.07 17.75 74.60% 68.25% 56.75% 83.33%
Communication Services Select Sector SPDR Fund XLC 20.32 19.13 54.92% 41.45% 30.57% 66.84%
Health Care Select Sector SPDR Fund XLV 15.21 15.3 68.25% 67.86% 76.98% 58.73%
Energy Select Sector SPDR Fund XLE 23.18 21.2 79.76% 75.00% 83.73% 87.30%
Consumer Discretionary Select Sector SPDR Fund XLY 17.87 16.76 71.43% 65.87% 42.86% 66.27%
Technology Select Sector SPDR Fund XLK 22.06 20.24 75.79% 74.21% 60.71% 84.92%
Financial Select Sector SPDR Fund XLF 19.58 18.27 77.78% 75.00% 61.11% 78.17%


  

  • Trading sector ETF options has become very popular and we decided to take a look to see how the market structure looks going into the Memorial Day Weekend holiday.
     
  • More shocking to see that implied volatility levels for defensive ETFs like the Consumer Staples Select Sector SPDR (XLP) and the Financials Select Sector SPDR (XLF) are some of the most expensive.
  • Look at those risk premiums!  Implied-Realized spreads are very high!
  • XLP has a “BUY” trading signal and a “Poor” Smart Beta rating.
  • XLF has a “SELL” trading signal.
     
  • Everyone seems to love utilities!  The Utilities Select Sector SPDR (XLU) is the cheapest Sector ETF based on implied volatility.
  • Worth noting the implied risk premiums even for XLU are rich as you move out more than 1-month.
  • XLU has a “SELL” trading signal.
     
  • Given the volatility in markets recently, just shocked to see that the Communication Services Select Sector SPDR (XLC) remains fairly valued in terms of implied volatility.
  • The Consumer Discretionary Select Sector SPDR (XLY) is similarly fairly valued
  • Our takeaway here is that the market isn’t overly worried about fundamentals for XLC and XLY since put buying hasn’t spiked.  It reiterates our “Buy The Dip” approach to these sectors.
  • XLC has a “BUY” trading signal. 
  • XLY has a “SELL” trading signal and a “Caution” Smart Beta rating.

 

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Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS