The set-up: Markets around the world are a little bit extended and the headlines are talking about how seemingly every index in the world has been setting new high after new high.
When the market gets extended, I don’t want to press for trades, but instead force myself to be patient and to wait for pullbacks so that I can buy dips.
Looking at this trend and past dips, one thing that has become clear is that emerging markets have outperformed domestic markets on every dip buy. That’s no typo. It’s a simple fact; emerging markets have been the better buy on dips throughout this year.
That has me watching the iShares MSCI Emerging Markets ETF (EEM).
Side note: What I love most about trading outside of the U.S. is that capturing moves greater than 10 percent is doable, provided you get the right entry point. Get the wrong entry point and, like any other trade, things might not work out at all.
What I’m looking for: The right entry price on EEM is off of the 50-day simple moving average line; $44.62 should it get there.
How I will play it: If we see a pullback to that level, I will look to December’s at-the-money call options, buying myself a little more time to prevent theta loss being a pain along the way. I would then look to stretch the move in EEM up $1 per share, which would give me at least 10 percent upside on my calls.
It could take a while to play out, but that’s the same with every potential dip scenario in this market. Ultimately, however, I think that patience pays off, and the technical and fundamentals in EEM will keep it on-watch for a while.
Davis Martin is the head trader at DailyProfitMachine.com. He trades SPY Calls and Puts and swing trades mid-large cap stocks and stock options. At the time this commentary was published on RagingBull.com, he had no shares, options or open orders on EEM – and he has never traded it before — but he was watching the chart and looking for an options play on the ETF as described in this commentary.