EEM Update – Submerging Markets?

by CC July 3, 2018 3:23 pm • Trade Updates

In mid May we targeted emerging market stocks for a possible decline over the next few months, originally detailing a put calendar. From 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

That worked out quite well as EEM finished June expiration right near strike and the short June 45 calls worthless. Afterwards, EEM continued declining and we updated the position, which was then just the August 45 puts, that were then worth about double from the original risk. From June 22nd:

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.

EEM is now lower by another 1.00 and I wanted to check in on those two roll ideas. Both are profitable, the roll that established the 45/41 put spread for about 1.30 is now worth 1.80, for an additional .50 in profits on top of the original trade’s .80. The roll lower that booked profits and established the 43/39 put spread for .60 is now worth about .95. It’s a bit counter intuitive that the profits on each are so close but the main issue here is that the 41 puts have increased in value for the higher put spread faster than the farther out of the money 39 puts on the lower spread. But moving forward that will change. As we get closer to August expiration it’s important to compare the two trade’s intrinsic versus extrinsic value. Right now the 45/41 put spread is worth over $2 intrinsically, meaning if the stock closed here on August expiration it would actually gain value as a result of it being in the money by more than its current mark to market value. On th eflipside, the 43/39 put spread is only worth .05 intrinsically, and would lose almost all its value if the stock closed at this spot on August expiration.

What that means from a trade management perspective is that one can be more patient on the higher striked put spread, and a little more careful for the lower striked spread should EEM go sideways or bounce slightly. It also means if EEM goes lower the lower put spread owner may want to be more aggressive about taking profits and the next sharp move lower.