Trade of the Day: iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB)

There’s a good probability the emerging market bonds are headed for a fall

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The bond market is in a huge bubble…and the place where you see the greatest weakness is the emerging-market bonds.

iShares J.P. Morgan USD Emerging Markets Bond ETF (NYSEARCA:EMB) has really gone up a lot — telling me that there’s a good probability that it may fall before December. It might not crack very quickly. But if anything’s going to crack, it’s going to be the emerging-market bonds. And with this trade that only costs us about $0.55, we’re in a good position:

Using a spread order, buy to open 1 EMB Dec. 15th $112 put and sell to open 2 EMB Dec. 15th $107 puts for a net debit of about $0.55.

This strategy — the ratio debit spread — is simply a way to lower the cost of buying options, as the two option(s) that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this ratio put debit spread is a way to lower the cost of establishing a bearish put option trade. Many brokers will require the use of margin and/or a set amount of reserved capital and/or a margin account to execute a debit spread; contact your broker directly for specific requirements.

Because you are short a naked put in this ratio put debit spread, you could be obligated to buy 100 shares of EMB at the $107 strike price for every 1 contract that you are short of the EMB Dec. 15th $107 puts. So, to avoid that, you’ll want to exit if EMB gets down to $107.

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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.

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