Lagging sector looks poised for a rebound. Here's how Mike Khouw is trading it
The Communication Services sector has lagged behind the broader market this year, yet recent price action suggests the group may be ready to turn the tide. The basket includes a wide mix of firms—from Alphabet and Meta, whose earnings stem from digital advertising, artificial‑intelligence services and cloud computing, to telecom giants Verizon, AT&T and T‑Mobile that run heavily regulated, capital‑intensive networks, as well as content creators such as Netflix, Disney and Fox. Despite this diversity, the sector trails the S&P 500 by more than 14 percent on a year‑to‑date basis.
Sector Diversity and Underperformance
The sector’s eclectic composition can actually provide a modest diversification benefit and keep overall volatility lower than many other groups. While global forces may favor one industry segment over another, all of these companies compete on the same communication‑focused playing field. Because the index has underperformed the benchmark by a sizable margin, investors are looking for signs that the lagging performance might be reversing.
Options Trade Setup
Recent price movements in the State Street Communication Services ETF (ticker XLC) have drawn attention. The fund has bounced off the $105 level on two separate occasions over the past several months, creating a technical reference point that can be used to structure an options position. The proposed trade involves a January 105/115/125 call‑spread risk reversal: sell the $105 put, buy the $115 call, and sell the $125 call. This arrangement lets a trader acquire the $115 call for just over $0.30, a steep discount compared with its market price of $4.35.
Trade Details and Risks
By selling the $105 put and the $125 call while buying the $115 call, the investor effectively purchases a $10‑wide call spread for roughly $0.30. The short put obligates the trader to purchase the ETF at $105 if the price falls below that strike, tying up margin and adding a cost component. The upside is capped at $125, meaning any rally beyond that level will not increase profit from the spread. Nevertheless, the structure offers a low‑cost way to stay long the sector while limiting downside exposure, provided the market respects the $105 support and can push toward the $115‑$125 range.
Overall, the Communication Services sector’s recent 6.5 percent total return—outpacing the S&P’s total return by more than five points—signals that the lag may be narrowing. Investors who understand the sector’s internal variety and are comfortable with the defined‑risk options framework could find an attractive entry point as the ETF seeks higher levels. As always, participants should assess margin requirements and personal risk tolerance before committing capital to the trade.
Source: CNBC · 2026-09-16