With the equity rally officially reaching silly status, it’s becoming increasingly difficult to find a stock that isn’t already scraping the stratosphere. For today’s trade idea, we’re traveling outside of the U.S. to find opportunity.
One of the few areas seeing a bit of profit-taking over the past week is emerging markets. The iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) cobbled together a three-day pullback that reversed sharply higher during Wednesday’s buying binge.
This week’s retreat carried EEM shares to the rising 20-day moving average. And it’s the first touch of the popular smoothing mechanism since the rally began in earnest at the beginning of the year. Considering the rarity of multi-day retracements, it’s no wonder buyers sallied forth to buy up EEM with abandon today.
With the rebound, EEM carved out a higher pivot low showing its uptrend is still very much intact. Momentum indicators from the MACD to the RSI are flashing firmly bullish signals. Both oscillators formed higher swing highs during the fund’s latest ascent. Consider that confirmation that the price trend in emerging markets is increasing in momentum.
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While the ideal entry would have been Wednesday morning when the EEM ETF galloped higher right out of the gate, profits remain for those looking to capitalize on its strength.
Sell EEM Puts and Emerge with Profits
Demand for EEM options has been on the rise. The implied volatility rank just tagged 20%, which is a three-month high. And that means option premiums are now ripe for the selling. Or, at least, riper than they’ve been in awhile.
If you’re willing to bet emerging markets remain above $37 for the next month, sell the April $37 put for 43 cents. The max gain is limited to the initial 43 cents and will be captured if the put sits out-of-the-money at expiration. Currently, the $37 strike puts have a delta of 0.26, which means the probability of acquiring the max gain stands at 74%.
By selling the put, you are obligating yourself to buy 100 shares of EEM at $37 if the option sits in-the-money expiration. If the idea of acquiring shares at that price doesn’t appeal to you, then close the trade if the fund falls to $37.
At the time of this writing, Tyler Craig held neutral options positions in EEM.
