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Carter Worth And Mike Khouw's XLU Trade

Carter Worth of Cornerstone Macro spoke on CNBC’s “Options Action” about Utilities Select Sector SPDR Fund (NYSE: XLU). He analyzed the return of the S&P 500 index versus the S&P 500 total return in the last 10 years, and he concluded the total return was 263% versus the index return of 194%. In the last 30 years, the difference was even higher. The total return was 2,022%, while the index return was 1,043%.

The analysis suggests the yield is half of the total return so Worth decided to take a closer look at XLU, which has a yield of 3.42% versus the S&P 500’s yield of 1.56%. He also thinks XLU is showing signs of bottoming, and he noticed a wedge pattern that should be resolved to the upside, in his opinion.

Options don’t pay dividends, but there are effective ways to collect yield on them, said Mike Khouw. A calendar trade is one of them. He suggested traders should sell the February $63 call for $1.25 and buy the June $63 call for $$2.75. The total cost for the trade would be $1.50. Khouw explained the shorter-dated options are going to decay more rapidly than the longer-dated options, which allows him to generate a yield of $1.20 over the course of a month or so.

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