economy
February 9, 2026
An options trade in materials group for when valuations get too rich
Stocks don't go up in a straight line. They can be oversold or a bit extended in the short-term. Such may be the case right now in materials, Mike Khouw says.
TL;DR
- Several sectors, including energy, regional banks, materials, consumer staples, and industrials, have shown strong performance this year.
- The materials sector ETF (XLB) appears extended, trading in the top decile relative to its 200-day moving average.
- Selling covered calls on XLB is currently attractive due to stretched prices and unusually rich option premiums (implied volatility 1.7 standard deviations above its 2-year mean).
- When ETFs trade far above long-term moving averages, a choppier market or a pause is more probable, though not guaranteed.
- Covered calls act as a short-volatility strategy, collecting premium in exchange for granting the right to buy shares at the strike price.
- Recent declines in gold and silver prices, key commodities for the materials sector, add to potential near-term headwinds.
- Selling covered calls can improve risk-adjusted outcomes by harvesting premium and enforcing disciplined exits.
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