The most popular emerging markets ETF, iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) has underperformed the S&P 500 by more than 12 percent in the last quarter of 2016.
The ETF has recently reclaimed the 200-day moving average and traders betting on a turnaround can achieve high returns via a bull put spread.
One trading opportunity for those traders with a bullish bias is a Bull Put Spread using the $35 strike as the short put and the $33 strike as the long put.
As of Friday’s close, this trade offered a roughly 32% return on risk over the next 17 calendar days when using the January 20th expiry.
The 200-day moving average is currently just below $35, so this trade represents a good risk / reward for those betting that iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) will stay above this line in the sand.
The maximum profit on the trade would be $49 per contract with a maximum risk of $151. The spread would achieve the maximum 32% profit if EEM closes above $35 on January 20th in which case the entire spread would expire worthless allowing the premium seller to keep the $49 option premium.
The maximum loss would occur if EEM closes below $33 on January 20th which would see the premium seller lose $151 on the trade.
The breakeven point for the Bull Put Spread is $34.51 which is calculated as $35 less the $0.49 option premium per contract. Keep in mind that due to the bid-ask spread, you may not be able to get filled at these prices.
Looking at the chart EEM recently broke below the 200 day moving average but quickly regained that key level.
The RSI indicator is at 55.09 which is neutral territory.
iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) is currently above both the 50 and 200 day moving averages. The 50 day moving average is above the 200 day moving average which is generally considered a bullish sign. However, the 50 day moving average is declining.
Counting against this ETF is the strong dollar and rising interest rates.
Max Wolff of 55 Capital recently said on CNBC’s Trading Nation “We do think the EEM space is not done with some fundamental difficulties. We think the surging dollar and the rise in interest rates is going to put some pressure” on EEM.
Options trading involves risk and is not suitable for some investors. Check with your financial advisor before making any investment decisions.
Disclosure: I have no positions in EEM
Note: Gavin has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. You can read more from Gavin at Options Trading IQ.