After a sharp sell-off caused by the Federal Reserve tempering expectations for multiple rate cuts in 2025, the markets are beginning to stabilize. Technical indicators are signaling a potential relief rally ahead and there’s a way with options to play a group of stocks that may see renewed interest. The Materials Select Sector SPDR Fund (XLB) , an ETF tracking the performance of chemical and metal makers within the S & P 500, is positively correlated with the S & P 500. A broader market bounce will likely benefit this sector as well. During earnings season, when individual stock volatility increases, ETFs like XLB provide an attractive alternative since they are not directly impacted by earnings reports. In this analysis, I focus on a bullish set-up for XLB using two simple indicators: RSI and MACD. RSI (Relative Strength Index): RSI measures the relative strength of price movement. Following the market pullback in December, RSI dropped into oversold territory, marked by the 30 threshold. A reversal is confirmed when RSI climbs back above 30, which is exactly what we are observing right now. MACD (Moving Average Convergence Divergence): MACD is a widely used indicator to confirm trends and spot reversals. The MACD crossover on December 5th coincided with XLB’s steep decline. However, we are now witnessing another MACD crossover to the upside, signaling a potential bullish reversal. These indicators together point to improving market conditions for XLB, making it a promising candidate for bullish trades as the broader market regains footing. With a positive bias in mind, I am planning to place a bullish trade on the XLB sector using options. Given the improving technical indicators and the broader market’s potential recovery, a bullish options strategy, such as a bull call spread, could capitalize on this upward momentum while maintaining defined risk. These setups are explored in greater detail in my book, Mean Reversion Trading . The trade To take a bullish trade on XLB, I am using a bull call spread. With XLB currently trading at $85.16, I would buy an $85 call and sell an $86 call as a single unit. Based on XLB’s movement, I will adjust my strikes around the current price to create this setup. For instance, if XLB rises to $87, I could structure the trade as a $87 to $88 call spread instead. The mechanics of the trade remain consistent, regardless of the strikes chosen, allowing flexibility while maintaining the same risk-reward profile. Here is my exact trade setup: Buy $85 call, Feb 21st expiry Sell $86 call, Feb 21st expiry Cost: $50 Potential Profit: $50 If XLB trades at or above the short strike (i.e., $86 in this example) by the expiration date, this trade could yield a 100% return on the amount risked. For instance, with 50 contracts, you would be risking $2,500 to potentially gain $2,500, making it a highly efficient trade with a clear and defined risk-reward structure. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. 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.
