Bullish Interest Picks Up in this Emerging Market as the Price Continues to Consolidate
When you look at the price of a stock or ETF, it isn’t always easy to see whether the stock is being accumulated or distributed. After a large move, it’s common to see a period of consolidation in the price and one side takes profits and the other looks to enter new positions. One way to see whether there is more accumulation or distribution is through the on-balance volume and other volume-based indicators. Another is by looking other markets, like the options market.
The option market is a secondary market where shares of the underlying can be controlled through the rights and obligations that the market provides. Call option buyers pay for the right to purchase the stock at a set price for a period of time. This provides the option buyer the ability to lock in the price to purchase the stock at a price and the benefit by potentially selling the stock at a higher price.
On Tuesday, there were indications of accumulation of shares, through the purchase of calls, on the iShares MSCI Brazil ETF (EWZ). The option buying occurred on the 29 MAY 20 $25 call strike and the 17 JUL 20 $28 call strike. The indication from this activity is that the price is expected to move high over the course of the next couple weeks and months.
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The price itself has been range-bound since the March 19 low near $20. The upper end of the range is near $26, which was most recently tested on April 29. From its current position, EWZ is certainly looking to breakout one way or the other, but it’s just a matter of when. The increased interest may lead one to believe it may be developing the potential to do so now.
With a potential target price near $30 or higher by the July expiration, option traders may want to consider a trade like a Call Ratio Backspread that will benefit in both directions in case the price falls.
The 17 JUL 20 24/26 call back ratio spread currently pays an $0.11 credit. The trade involves selling one $24 call and buying two $26 calls. The trade makes $11 by expiration if the price is below $24. The max loss is $189 if the price pegs $26 by expiration. The gains if the price moves higher are unlimited. The intent is to close the trade about 2 weeks before expiration or if the price rises toward $30. If the price finishes below $24 at expiration, the options will expire worthless and the $11 credit will be kept.