New Trade Alert for (EEM)
Emerging Markets Exchange Traded Fund
Buy January EEM $30 Call @$5.25 or less
Risk Rating: 2 (1 = lowest 5 = highest)
Above Break Even Probability: 47%
Probability of maximum loss: 19%
Place Stop Loss at half of premium paid.
No Rate Hikes… Emerging Opportunity
The exhaustive discussion about Fed policy action has cooled with weaker than expected monthly employment numbers and Brexit worries. It is not a matter of IF rates rise but when…
The markets had anticipated in 2015 that rate moves would be fast and furious, one quarter percent symbolic bump, driving the Dollar to multiyear heights.
That Dollar strength damaged Emerging Markets that have lost 15% in the last year even after this major EEM recovery off the extreme lows.
EEM has traded mostly from $32-$36 since October with a blast above the $34 midpoint this week.
A breakout above the $36 channel top targets a $4 measured move to $40. Incidentally that $40 mark was the old 2011 to 2015 price pivot where the drop originated.
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 $110 midpoint support lows level on the weekly basis would negate the bottom base in the Russell 2000 index.
The Options Way: Unlimited Upside Potential with Limited Risk.
An EEM 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 expirations. 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 is 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 EEM trading at $34.50, for example, an In The Money $30.00 strike option currently has $4.50 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 $5.50 or less. A close below $30 on a weekly basis or the loss of half of the option premium would trigger an exit.
This option strike gives you the right to buy the shares at $30 per share with absolutely limited risk. $27.61 is the 52 week low and lowest point since 2009 in EEM.
The January option has seven 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 $550 or less paid per option contract. A stop loss at half of the premium paid puts the exposure at about $250. The upside, on the other hand, is unlimited.
The EEM option trade break-even is $35.50 at expiration ($30 strike plus $5.50 option premium). That is $1 above EEM’s current price.
A solid push above the $36 channel top targets a measured move to $40. If that objective is reached, the option investment would gain 100%.