EEM Signal - August 12, 2013


By: Andrew Keene

EEM, the fourth largest U.S. ETF ranked by assets which invests in emerging markets, hopes to capitalize on the recent growth in Asia, but experts cite excessive volatility and the strength of developed market ETFs as potential downfalls for EEM. While the price swings have little impact on long-term investors, excess volatility can spur bigger losses if clients trade in times of market turmoil,” making EEM a tricky fund to manipulate for most investors. Other stock analysts show that tools such as PMIs (purchasing managers indices) also reveal EEM to not be as strong as most think. PMIs are measurements of how other investors feel about a given stock, and they incorporate factors such as productivity, volume of purchases, and inventory levels.

Most new markets like Brazil, India, and China which are cited for recent strong growth and stabilizing economies are at or below the 50% PMI level, which means that investors expect virtually no change in future growth for these markets. This is a bearish sign for EEM because this ETF heavily depends on those Asian markets to stay afloat. Also, the fact that other developed market ETFs like EFA have increased 10% YTD while EEM has decreased 12% in the same time period due to losses across all 10 of its sectors does not bode well for future investor optimism.

My Trade: Selling the EEM September 39.5-40.5 Bear Call Spread for $.45
Selling the EEM Sep 30.5 Calls and buying the Sep 40.5 Calls
Risk: $55 per 1 lot
Reward: $45 per 1 lot
Breakeven: $39.95

I like this trade, because with the EEM sitting at $39.65, I make money on this trade if the stock goes down, flat, or up less 1% by September expiration.

Andrew Keene spent 10 years as an independent equity options trader on the Chicago Board of Options Exchange, during which he spent the majority of his time as a market-maker for over 125 stocks. Andrew currently trades futures, currencies and commodities. When he's not trading, Andrew appears on top business television shows including CNBC's Squawk on the Street, Street Smart on Bloomberg TV and First Business, a show that is syndicated across the United States. Andrew graduated from the University of Illinois with a degree in Finance with a concentration in Accountancy.