- During July, LABU traded in a narrow range. In August, its uptrend has resumed.
- We expect that LABU’s uptrend has a long way to go.
- A block of LABU trades started on July 21 has done extremely well so far.
- A paper trade done on SPXL is shown for comparison.
Investment Thesis
On July 8, Seeking Alpha published my article where I rated [[LABU]] as a BUY. LABU is a 3X leveraged ETF of the biotechnology sector. When analyzing LABU's prospects, it is ok to use its non-leveraged counterpart, XBI - the SPDR S&P Biotech ETF.
In that article, I published a chart dated 21 June when I decided to write the article. For putting things in perspective, I republish that chart, together with an updated version for August 10.
stockcharts.com stockcharts.com
We see that in the first half of July, XBI increased its relative strength to [[SPY]], but during the second half XBI's relative strength declined from the 50-day MA to the 200-day MA. Since the beginning of August XBI's relative strength increased a great deal and it sits now well above its 50-day MA.
Below we show the charts of XBI and LABU. The charts are identical, except for the price values.
stockcharts.com stockcharts.com
XBI - LABU - SPY - SPXL Relationships
XBI is a non-leveraged biotech ETF, while LABU is 3X leveraged of the same.
SPY is a non-leveraged ETF for the S&P 500 index, while [[SPXL]] is 3X leveraged of the same.
XBI has low correlation with SPY. The same applies to the LABU, SPXL pair.
Trade Examples
On July 21. I executed a block of trades with LABU. For comparison purposes, I also paper-traded the same block with SPXL. The results of the trades at the market close of August 10 are shown in the following two tables.
LABU trades 0n July 21:
Buy 100 shares of LABU at $9.60. Sell one $10 call, expiration 9/16 at $1.80. Sell one $10 put, expiration 9/16 at $2.25. Buy one $10 call, expiration 12/16 at $2.90
The put should be guaranteed with a cash position of $775.
Asset | Quantity | Expiration | Strike Price | Buy/Sell Price | Aug 10 Price | Gain/Loss | |
LABU | shares | 100 | $9.60 | $12.54 | $294 | ||
C | -1 | 9/16/2022 | $10 | $1.80 | $3.40 | ($160) | |
P | -1 | 9/16/2022 | $10 | $2.25 | $0.85 | $140 | |
C | 1 | 12/16/2022 | $10 | $2.90 | $4.70 | $180 | |
CASH for PUT | $775 | $454 | |||||
TOTAL FUNDS | $2,025 | 22.42% |
SPXL paper trades on July 21:
Buy 100 shares of LABU at $73.30. Sell one $75 call, expiration 9/16 at $7.05. Sell one $75 put, expiration 9/16 at $8.20. Buy one $75 call, expiration 1/20/23 at $13.25
The put should be guaranteed with a cash position of $6,680.
Asset | Quantity | Expiration | Strike Price | Buy/Sell Price | Aug 10 Price | Gain/Loss | |
SPXL | shares | 100 | $73.30 | $89.03 | $1,573 | ||
C | -1 | 9/16/2022 | $75 | $7.05 | $16.00 | ($895) | |
P | -1 | 9/16/2022 | $75 | $8.20 | $1.95 | $625 | |
C | 1 | 1/20/2023 | $75 | $13.25 | $22.70 | $945 | |
CASH for PUT | $6,680 | $2,248 | |||||
TOTAL FUNDS | $15,335 | 14.66% |
Conclusion
LABU presents a profitable investing opportunity. LABU is a BUY.
For further details see:
LABU Continues In Uptrend (Technical Analysis)