Comeuppance has finally arrived for any and all bears who have overstayed their welcome. With oil finally, finally, scoring back-to-back up days, selling pressure in the land of equities has subsided and a bona fide bounce is commencing.
We’ve all known it was coming. It just took fourteen false starts before the real deal finally materialized.
How long it lasts remains to be seen, but if you’ve been wanting to jump in once signs of a strong bounce materialized, consider this your invitation. And if you’re looking to snatch up bargains in beaten-down areas, might I suggest emerging markets?
With its exposure to China and areas of the globe that are hypersensitive to commodity prices, the iShares MSCI Emerging Markets Indx (ETF) (EEM) has suffered tremendously amid the oil crash.
At near $28 as of Thursday’s close, EEM stock is down 36% from its intermediate peak in April 2015. And, along with darn near anything else stock related, it’s oversold as oversold can be.
While buying EEM outright is certainly the play for brave souls, it lacks any type of edge, or protection for that matter. So, to increase the odds of success, consider coupling your EEM purchase with a covered call.
Given the elevated volatility striking fear into the peasantry, option premiums are pumped, granting payment aplenty to those with the guts to step up and sell them. That means more income for EEM covered-call sellers, not to mention more protection.
The EEM Covered Call Trade
Buy EEM and sell the Feb $30 call for around 50 cents. Assuming you snatch up shares around $29.20, then your potential profit for the trade is $1.30. Basically you’re scoring 50 cents of premium plus the potential to make 80 cents in the stock should EEM rise above $30 by February expiration.
While $1.30 may not sound like a lot, it does amount to a 4.5% return over the next month which is commendable for a covered-call trade. Annualized, that comes out to a whopping 54% return.
The cost basis for the trade is $28.70 and represents the max risk. Should EEM stock bottom out in the weeks ahead, you will have the ability to continue selling covered calls if the income remains attractive.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
