On August 16th we initiated a bearish position in EEM, the emerging markets etf. The trade we landed on looked to fade the lack of volatility into Labor Day weekend in order to finance November puts. Here was the original trade and some rationale:
*Buy the EEM ($37.70) Sept 2nd/ November 36 put spread for .70
- Sell 1 Sept2nd 36 put at .15
- Buy 1 Nov 36 put for .85
Rationale – This trade works best if EEM’s rally fails over the next couple of weeks and the etf pulls back towards its recent breakout level. If that were to occur there’s plenty of things that can be done with the trade including taking profits or continuing to roll the short put.
With the etf now down more than a dollar from our entry and the Sept2nd expiration quickly approaching it now looks like a good chance to roll this trade, take some of the risk off the table and still be positioned for more downward volatility in the Fall. With the etf now 36.50, the original trade is worth a little over a dollar vs the .70 initial cost. The Sept2nd puts are worth about .13 here and need to be closed in order to roll the trade:
Action: vs long EEM ($36.50) Nov 36 puts
- Bought to Close the Sept 2nd 36 puts for .13
- Sold to open the November 33 puts at .43
New Position – Long the Nov 36/33 put spread for .40 (currently worth .75)
Rationale – This takes .30 of risk off from the original trade and establishes a put spread vertical with a lot of time out to November expiration. The max gain possible is 2.60 at or below $33 in November and the most that can be lost is 0.40 if EEM is 36 or higher on Nov expiration. We have not booked any profits on this trade with this roll, merely reduced cost (and money at risk) and left ourselves with a nice risk/reward while slightly increasing our short delta exposure. This trade captures many potentially volatile events this Fall including FOMC meetings and the election.