Spectators waiting for a price dip in the iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) are finally having their day in the sun. EEM stock has quietly receded alongside U.S. equities in recent weeks towards its rising 50-day moving average. And therein lies opportunity.
Thus far, EEM’s peak-to-trough descent has delivered a roughly 3% haircut to its share price. While bargain hunters would have preferred more bloodletting, a 3% stumble is about as good as it gets given the bullish undertones of global stocks this year.
Foreign stocks are doing quite well so far relative to their U.S. counterparts. Year-to-date the emerging markets ETF is up 12% while the S&P 500 is only up 5%. Moving averages of all stripes have followed EEM higher, like loyal puppy dogs. The 200-day, 50-day, and 20-day averages are all pointing up.
It’s worth noting the last time the fund pulled back to its rising 50-day MA, buyers swarmed, delivering a strong rebound that carried the fund to a new 52-week high at $40.23.
We’re about to see if they step up to defend their turf once more.
The EEM Trade
Perhaps the biggest benefit of this price dip is its effect on implied volatility. Fear of further downside has driven implied volatility to a new high for 2017, and that means EEM options are ripe for the selling. Essentially, premium sellers are receiving more compensation now than at any time over the past four months.
If you’re willing to wager emerging markets sit above $38 at May expiration, then sell the May $38 put for 45 cents.
The initial premium received represents the maximum potential reward and will be captured if the puts are out-of-the-money at expiration. By shorting the put, you are obligated to buy 100 shares of the fund at $38 if the put sits in-the-money. If you’re a willing buyer down there, then allow assignment if EEM tumbles from here. Otherwise, you can buy back the option near expiration to close the trade.
At the time of this writing, Tyler Craig held naked puts and covered call positions in EEM.