Bought 1 XLF Jun08 33 put for $7.40

This is an interesting trade because the underlying is an ETF.  This is the first time I’ve traded options on an ETF, but my understanding is that the mechanics of it are the same as any other stock.  So far, I see no disadvantages to trading on an ETF, and three major advantages.

• There are no earnings releases for an ETF, so I won’t have the usual problem of not being able to trade a good entry signal because of upcoming earnings.  I had three buy signals today that I couldn’t take for that very reason.
• There is high liquidity on both the ETF and the majority of its options.  I missed another trade today on a stock with a good signal but low liquidity on its options.
• The options have strike prices that are $1 apart rather than $5.  This makes it easier to find the option that gives the right risk/reward balance based on the current price of the underlying.  I missed yet another trade today because the $50 put wasn’t far enough in the money and the $55 put cost too much.

We’ll see how this trade goes, but I’m going to keep my eye out for ETFs in the future.

Now about this particular trade.  This stock has been in a downtrend since June 2007.  It has been trading in almost a perfect channel between two trendlines, and has just come up and bounced down off the resistance line, with confirmation from the MACD and stochastics.

The stock is currently at $25.62.  Support is around $21.60 and resistance is around $27.00.

My exit orders are:

• Market order to exit if the stock trades above $27.80
• Trailing stop loss if the stock trades below $22.25
• Stop loss on the option at $3.80