As we highlighted in last week’s Options Theory blog, the Bear Tamer system has been operating as planned with our mock investment in the Russell 2000 ETF (IWM). The original reason for using IWM as our go-to ETF was simple: it was cheaper than SPY, DIA, or QQQ thus making it easier for traders to snatch-up the 100 shares necessary to deploy the Bear Tamer.
As a pure small-cap ETF, IWM doesn’t offer as much global exposure as, say, the S&P 500 or Dow Jones Industrial Average. Though all three of these indexes consist of companies domiciled in the U.S., because the latter two hold many large-cap multinationals, they derive a significant amount of their revenue overseas.
Nonetheless, the S&P 500 and Dow aren’t the simplest way to invest in foreign developed or emerging markets. For that, we need an ETF that holds companies owned and operated outside of America. There are many to choose from, but only a few meet the liquidity requirements necessary to trade options on.
For foreign developed markets the best candidate is the iShares EAFE ETF (EFA). It trades tens of millions of shares a day and has liquid options to boot. Weeklys are available, and strike prices are listed in $1-increments.
The primary issue I’ve come across in trying to implement the Bear Tamer or even a simple covered call strategy on EFA is the lack of volatility. It’s not necessarily a deal breaker, but the call premiums offered are paltry, so you’ll need to adjust your expectations accordingly.
Those looking to venture farther out on the risk-reward spectrum could consider emerging market ETFs designed to track such countries as Brazil, Russia, India, and China. The clear winner in the space from a popularity perspective is the iShares Emerging Markets ETF (EEM). It frequently trades over 100 million shares a day, offers weeklys options, and strike prices in 50 cent increments. And that means you have more flexibility when building trades.
Now that we’ve been tracking the Bear Tamer system for a good four months on IWM, I’ve decided to add EEM to the mix. This will allow us to discuss two different positions and increase the amount of commentary I can provide in our monthly Mastermind Group meetings to help you properly understanding and implement the system.
Because EEM is about 1/4th the price of IWM, it will provide a nice contrast to see how to the premium of calls and puts varies on a $40 stock versus $140.
I also like the entry point for EEM a great deal more than our initial buy on IWM. We ended up purchasing IWM right at its all-time highs and have since seen the fund drop as much as 25%. EEM is currently trading 22% off its peak and boasts a much more compelling valuation versus U.S. stocks. Additionally, EEM carries a dividend yield of 2.89% compared to IWM’s paltry 1.32%.
On the price front, EEM has stabilized over the past quarter exhibiting solid relative strength versus the S&P 500. It’s now in the process of building a potential double bottom and has climbed back above its 50-day moving average.
I’ll review how I built the trade in our January Mastermind Group meeting on the 23rd.
