iShares MSCI Emerging Markets Indx (ETF) Approaches a ‘Prime Buy’ Spot

A pullback in EEM coupled with high implied volatility means it's naked put time!

By Tyler Craig, Tales of a Technician

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Eyes up, diversification seekers. The iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) offers exposure to a basket of countries outside the U.S., and she’s approaching a prime buy spot. Indeed, the time to strike EEM is nigh at hand, and the only lingering question is how to structure your bet.

The options market is providing some sweet loot due to the elevated anxiety surrounding Wednesday’s downdraft. More on that in a minute but first, let’s chronicle the beauty of EEM’s price action this year.

2017 sparked new life into emerging markets as they finally decided to join the bull market gripping U.S. equities. Year-to-date the fund is up an impressive 32%. And while the robust rise is worthy of gawking, it’s the consistency of the trend that deserves the most praise. Just look at the channel that has defined this year’s ascent.


Click to Enlarge
Source: OptionsAnalytix

The lower trendline corresponds with the 50-day moving average, and it’s been a gathering ground for buyers all year long.

This week’s retreat is carrying EEM right back to the lower-end of the channel giving bulls yet another chance to strike.

Barring some unforeseen bear raid, this dip should get gobbled up like all its predecessors.

The EEM Trade

The recent selling pressure appears a garden-variety pullback, but underneath the surface, fear is on the rise. The uptick in options demand has driven the implied volatility rank to 63%, its highest level in almost a year. The high volatility suggests short premium strategies are now paying a pretty penny.

If you’re willing to bet the fund remains above $44 for the next six weeks, then sell the Jan $44 puts for 55 cents. You will capture the max reward of 55 cents if EEM sits atop $44 at expiration.

By selling the put, you are obligated to buy EEM at an effective purchase price of $43.45, which should be a great entry point for a longer-term investment.

As of this writing, Tyler Craig held bullish options positions in EEM. Want more education on how to trade? Check out his trading blog, Tales of a Technician.


Article printed from InvestorPlace Media, https://investorplace.com/2017/11/emerging-markets-eem-approach-prime-buy-spot/.

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