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Persistent inflation could mean interest rates keep rebounding. To profit from this possibility, here’s an options trade that bets against the housing market. We learned last Friday that the Federal Reserve’s preferred measure of inflation is remaining sticky and that could lead the central bank to delay anticipated interest rate cuts which were widely expected to begin in June. US10Y YTD mountain U.S. 10-year Treasury yield so far in 2024 I’m contemplating a bearish trade on Lowe’s (LOW) within the consumer discretionary sector. This stems from the anticipation that a high-interest-rate environment will continue to burden home buyers, ultimately exerting negative pressure on stocks like Home Depot and Lowe’s. Looking at the 6-month daily chart of LOW, there are several indications of a change in trend. RSI (Relative Strength Index): I’ve employed RSI to assess weakness. It’s a straightforward tool – when the RSI exceeds the 70 area, a stock is deemed overbought. However, since securities can remain overbought for extended periods, it’s essential to wait for the RSI to dip below 70 before considering a bearish trade setup. This is exactly what is unfolding with Lowes right now. DMI (Directional Movement Index): When the DI+ (green line) is above DI- (red line), the stock is in an uptrend. However, when the DI lines start changing direction, that indicates a possible change in the current trend. The last piece of evidence comes from price action itself. The chart below shows a series of lower highs and lower lows confirming the downtrend. The trade structure I am using here is called a “bear put spread” also known as “put debit spread”. The trade Here is my exact trade setup: Buy $250 put, April 19th expiry Sell $245 put, April 19th expiry Cost: $250 Potential Profit: $250 I have chosen April 19th as the expiration for this trade which is only 17 days away. I have done this because in my experience, bear put spreads work best between 14-21 days. If LOW trades at or below my short strike by the expiration date, this trade can yield a 100% ROI on the amount risked. With 10 contracts, this equates to risking $2500 to potentially gain $2500 DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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