Trade Update – Closing $EEM Put Spread for a profit

by CC December 4, 2015 10:46 am • Commentary

On November 6th we placed a trade in the emerging markets etf EEM. Our thinking was that a rising dollar into what looked like a more and more likely December liftoff for the Fed would keep the downward pressure on emerging markets. Here was the trade and rationale at the time:

EEM ($35.30) Buy Dec 35 / 32 Put Spread for 70 cents

-Buy to open 1 Dec 35 put for 90 cents

-Sell to open 1 Dec 32 put at 20 cents

Rationale:  EM stocks and EM currencies should be the first thing hit on a US rate increase, if we get one. Options in EEM are relatively cheap, and this spread offers a break-even down 3%, with a max potential profit down 9% of 3x the premium at risk. Given the upcoming event, I like the risk reward of this trade.

We’re now getting close to what could be a sell the news situation. The odds of a FOMC rate increase in December are now about 80%. EEM was under pressure the past few days as global equities sold off but seesm to have found some temporary footing this morning. Rather than stick around with the chance of it bouncing a little here we like the idea of taking profits now and seeing how these crowded trades adjust into the Fed meeting.

ACTION – Sold to close the EEM (33.75) Dec 35/32 put spread at 1.25 for a .55 profit
  • bought to close 1 Dec 32 put for .13
  • sold to close 1 Dec 35 put at 1.38