New Trade Alert for (EWJ)
iShares Japan ETF September $11.00 Call @$1.50 or less
Risk Rating: 2 (1 = lowest 5 = highest)
Above Break Even Probability: 47%
Max Loss Probability: 17%
Global markets have stabilized and now surged after the New Year nonsense. The broad market S&P melt up is now over 15% off the bottom base to move positive in 2016 and also over the exhausting last 52 week period.
Never fight the fed has been translated into many languages…Central banks around the world are hard in attempts to stimulate inflation and economic growth for their home countries.
Never ending monetary policy creativity tries to cattle prod performance in stagnant situations.
The Japanese market as viewed by the EWJ iShares Japanese Exchange Traded Fund has cut losses from the minus 20% level to a more modest negative 6% over the last year of trade.
EWJ has largely tracked from $11 to $12 for the last three years plus. This positive price push above $12 has the first measured move objective target at $13 which stands a healthy 8% higher.
Instead of buying long shares, a stock substitution strategy limits risk to the premium paid with unlimited upside profit potential. Less capital is required and the risk is less in dollar terms than buying shares outright.
Only close below the $10 support level on the weekly basis would negate the bullish trend.
The Options Way: Unlimited Upside Potential with Limited Risk.
An EWJ long call option can provide the staying power in a potential larger trend extension. More importantly, the maximum risk is the premium paid.
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares — that’s the power of leverage.
Choosing an option can sometimes be a daunting task with all of the choices and expiration months. Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.
There are two rules options traders need to follow to be successful.
Rule One: Choose an option with 70% plus probability. The Delta is a measurement of how well the option reacts to movement in the underlying security. It is important to buy options that payoff from only a modest price move.
There is no need to ONLY make money on the all but infrequent large price explosion.
Any trade has a fifty/fifty chance of success. Buying options ITM options increase that probability. That Delta also approximates the odds that the option will be In The Money at expiration.
Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off.
With EWJ trading at $12.10, for example, an In The Money $11.00 strike option currently has $1.10 in real or intrinsic value. The remainder of any premium is the time value of the option.
Rule Two: Buy more time until expiration than you may need. Time is an investor’s greatest asset when you have completely limited the exposure risks.
Investors often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market move.
Trade Setup: I recommend the EWJ Sept. $11 Call at $1.50 or less.
This option strike gives you the right to buy the shares at $11 per share with absolutely limited risk. The 52 week low is $10.18 to put price into perspective.
The September option has five months for BULLISH development. An 80 Delta on this strike means the option will behave much like the stock.
The maximum loss is limited to the $150 or less paid per option contract.
The upside, on the other hand, is unlimited.
The EWJ option trade break-even is $12.50 or less at expiration ($11 strike plus $1.50 option premium). That is less than 50 cents above the current iShares Japan ETF price.
This solid push above this $12 resistance targets a $13 objective. The option investment gain would be nearly 50%.