Check out the price on March at the money call options on Emerging Markets (EEM) and Nasdaq (QQQ) versus the S&P500 (SPY). Emerging Markets and Nasdaq call options are cheap! And if you are betting on a continued market rally (like I am), then I’d buy calls on EEM and QQQ before SPY. In fact, I did! (subscribers are welcome to see the specifics by logging in). Keep reading for more insight, and I hope it will help you identify some good trading opportunities…
First off the market has been on an incredible bull run over the last month and a half, and you have to believe it will continue before you get long the markets. I for one, believe leading into a presidential election and the determination of the European Union to protect the euro will lead our markets higher. This isn’t fundamental analysis on a company, but rather it’s an acknowledgement of the government and regulators continued efforts to manipulate the markets. I’m not saying it’s the right thing to manipulate markets, I’m just saying it’s the right thing to do to use this to your advantage if you want to make money!
The markets have been in “risk on” “risk off” mode for several years now as asset class correlations around the world remain extraordinarily high. Further, riskier assets (such as Nasdaq and Emerging Markets) continue to have a higher “beta” than relatively less risky assets like the Dow Jones or the S&P500. According to every credible options pricing model, when at the money call options on two underlying assets with the same expiration date are similar in every regard except volatility then the options with higher volatility should cost more. This is not the case right now with March call options on Emerging Markets (EEM) and Nasdaq (QQQ) versus the S&P 500 (SPY). I could spend a lot of time postulating reasons why this is (e.g. people like to trade SPY options more and have bid up the price, or perhaps people are uncomfortable with the extent to which EEM and QQQ have outperformed SPY year-to-date suggesting a pull pack or reversion to the mean is due), but I don’t care. I believe markets are going higher for the afore stated reasons (government and regulator market manipulation) so I want the higher beta of EEM and QQQ over SPY and the fact that the cost of EEM and QQQ are cheap relative to SPY makes them even more attractive to me.
I hope you’re able to glean some valuable insights, information and/or ideas from this article. Subscribers are welcome to login to see how I’m playing this situation (there are actually some very clever opportunities to trade the spread between these options prices in addition to just getting long the markets cheaply which I believe is the right trade right now). Never invest more than you can afford to lose, and as always, always be ready!