LABU Continues In Uptrend (Technical Analysis)

Investment Thesis

On July 8, Seeking Alpha publishedmy articlewhere I rated NYSEARCA:LABUas 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.

We see that in the first half of July, XBI increased its relative strength toSPY, 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.

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, whileSPXLis 3X leveraged of the same.

XBI has low correlation with SPY. The same applies to the LABU, SPXL pair.

Trade Examples

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.

• 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.

• Buy 100 shares of SPXL 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.

Conclusion

LABU presents a profitable investing opportunity. LABU is a BUY.