In mid May we checked in on emerging market stocks and detailed a way to position for the etf EEM to break support at some point this summer. Here was the original trade, a put calendar, originally posted May 18th:
EEM ($46.07) Buy June / Aug 45 put calendar for 80 cents
-Sell to open 1 June 45 put at 50 cents
-Buy to open 1 Aug 45 put for 1.30
The calendar structure was the correct way to trade this as EEM settled in near the 45 strike and the June 45 puts expired worthless. This week, the etf has indeed broken that support and now is below 44. So let’s check in on the trade and see how to best manage.
With EEM 43.95 and the June 45 puts expired, this position is simply the Aug 45 puts, now trading 1.63. That’s now more than a double from the original .80 risked. And we now have the opportunity to either book profits or at least reduce risk.
Besides just taking the profits from the trade currently, I think the best way to extend is to go out to August and look for a put sale that reduces some of the current risk. Right now the Aug 41 puts can be sold at .35. That reduces the original risk to just .45 with the chance for the trade to be worth up to 4.00 if the etf is at or below 41 on August expiration. It does not book any of the current profits but does reduce that profit risk slightly.
The other way to take more risk off the table and possibly even book some profits is to close the Aug 45 puts and use those proceeds to roll into a lower put spread. The Aug 43/39 put spread costs about .60, meaning it books a small bit of the profits and allows for up to 3.20 in additional profits.