May 30, 2017

Emerging Markets (EEM)…Potential Bear Call Spread?

The market continues to teeter at the top.

Approximately 58.5% of the ETFs we follow in the daily options blog are in a short-term extreme state at the moment. Typically when we see levels this high a short-term reprieve follows.

One of the reasons the ratio is above 58% is the international ETFs. All of the highly-liquid international ETFs we follow are in a short-term extreme. India (EPI) is by far the most overbought at the moment, but it’s actually the emerging markets ETF (EEM) that has drawn my attention.

With EEM trading at roughly $42.50 we can take advantage of the current short-term overbought extreme by selling a vertical call, or bear call spread. The implied volatility for EEM for the June monthly options (38 days left until expiration) stands at 16.7%.

5-13-2014 EEM

The following compares the aggressiveness of two potential trades. Hopefully, it will give you some insight into the types of decisions you have to make as seller of options. Remember, as an options seller you have the ability to choose your own probability of success.

  1. An aggressive short-term play – selling the EEM May 43/45 weekly options with 16 days left until expiration for $0.23. If you look at the open interest around those strikes it seems like someone with big volume had a similar idea. The probability on the trade – 67.88%. The potential return over the next 16 days 13.0%. It must be noted that if EEM moved decisively lower over the next 1-2 trading days I would, in most cases, take the trade off for a small gain. I don’t like holding on to trades with probabilities less than say 78%.
  2. Take on a more conservative trade by selling the June 44/46 monthly options with 37 days left until expiration for $0.20. The probability on the trade is 80.27%. The return – 11.1%.

Of course, there are numerous other combinations. Hopefully, this sparks further interest in how to scope out potential trades. I plan on doing a video on the topic soon. Stay tuned!

Also, due to the enormous amount of requests over the past week I have decided to keep my annual deal available for several more days.

Daily Options blog

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  • Gary W

    If you did the $EEM weekly where and how would to take the trade off early, please walk me through it.

  • Gary W

    would you sell this immediately after the order gets filled and the credit appears? within minutes of the order being placed? when is the best time to sell?