Options for stock investors. A better way to trade.

New Trade Alert – EWG German Exchange Traded Fund

New TradeAlert for (EWG)

 

BUY iShares German Exchange Traded Fund January EWG $30 Call @ $4.50 or less

Risk Rating: 2.5     (1 = lowest   5 = highest)
Above Break Even Probability: 52%
Max Loss Probability: 25%

 


Go Go Global Growth

The not just U.S. stock rally run has foreign markets performing well over the last decade.  In fact, the Nikkei 100% has outdone the S&P in the last five years.

 

The February two week profit taking unwind hit market around the globe to discount share prices nearly 10%.

 

EWG the German ETF s backed off to a buying base.

EWG dropped to $32 support after peaking at $36 in January.

 

Remember that every selloff in U.S. stock market history has rebounded to make higher highs…

 

The first EWG target is a return to that tip top then $40 as the measured move target on a full “V” recovery. 

 

 

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 $30.00 on the weekly basis would negate the bullish premise.

The Options Way: Unlimited Upside Potential with Limited Risk.

An EWG 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 and strikes.  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 EWG trading at $33.00, for example, an In The Money $30.00 strike option currently has $3.00 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. 

Traders 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 January $30 Call at $4.50 or less.   A close below $30 on a weekly basis or the loss of half of the option premium could trigger an exit.

This option strike gives you the right to buy the shares at $30 per share with absolutely limited risk. That discounted level has not been since since May.    

The January option has nearly eleven months for BULLISH development. A 74 Delta on this strike means the option will behave much like the stock.
 
The maximum loss is limited to the $450 or less paid per option contract.  The upside, on the other hand, is unlimited.

 

The EWG option trade break-even is $34.50 at expiration ($30 strike plus $4.50 option premium). That is just $1.50 above the current iShares Germany ETF price.

 

 

A modest push to $36 highs would see option gain 50%.  A higher EWG price objective stands at $40 on a full “V” recovery.

 

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