Mike Khouw's IYR And XLU Options Trades

On CNBC's "Options Action," Mike Khouw said there is some rationale for why people are chasing iShares US Real Estate ETF IYR at pretty heavy valuations. One of the reasons for such behavior could be a potential prolonged Fed policy, which would put the reflation trade back on. In a such scenario, investors would be selling the treasuries and buying something like real estate because it creates yield on an inflation-adjusted basis.

Khouw finds IYR too expensive and he wants to use options to set up a bearish position. He wants to buy the December $109/$99 put spread for $2.30. The trade breaks even at $106.70 or 4.11% below the closing price on Friday. It can make a maximal profit of $7.70 in case the stock drops to $99 or lower at the December expiration.

Utilities Select Sector SPDR Fund XLU is not trading at high valuations and it is also an inflation-adjusted yield trade, said Khouw. He would buy the October $70 calls for $1.13. The trade breaks even at $71.13 or 2.36% above the closing price on Friday.

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