This Bullish Trade Could Double Your Money by May

Option Trade of the Day: iShares Emerging Markets ETF (NYSE: EEM)

Last night’s scans produced an astounding 220 bullish signals and not a single bearish signal, except for inverse ETFs which actually count on the bullish side of the equation. When I added these numbers to my barometer I got a reading of 122.2 and that is the third highest reading I have ever gotten since I started tracking this indicator on January 1, 2009.

[hana-code-insert name=’adsense-article’ /]The only other readings that were higher came on July 6, 2010 (129.2) and November 28, 2011 (122.4).

Both of those signals were pretty strong signals both in the short term and in the intermediate term.

The one in July ’10 came just before a 9.7% one-month gain and 19.24% in four months.

The one from November ’11 came just before a 6.1% one-month gain and 18.8% in four months.

While these are encouraging signs for the market, I wouldn’t run out and sell all of my bearish plays immediately.

The volatility continued yesterday with the main indices making wild swings most of the day. There was over a 500-point swing on the Dow and almost a 50-point swing on the S&P. Even with that in mind, I am making a call the option trade idea for today.

The iShares Emerging Markets ETF (NYSE: EEM) is another trade I have recommended several times over the past year with great success. When the markets are vacillating greatly, it is usually a good thing to return to a stock or ETF that you have traded successfully in the past.

The EEM hit an oversold level similar to the one we saw back in late September and in early December, at least based on the stochastic readings. In both of those cases, the EEM rallied both over the short term and even over a little longer term. The sentiment toward the EEM hit is most bearish level of the past two years on Monday and past instances of bearish sentiment have been good signs for the EEM.

Buy to open the April18 46 strike calls on EEM at $3.00 or better. These options expire on April 20. Based on the EEM closing at $47.33 yesterday and the price of these options being just under $3.00, we would need a gain of approximately 10% in the next few months in order for the options to double and that seems realistic based on previous oversold readings and bearish sentiment readings.

— Rick Pendergraft

OPTIONS DISCLAIMER: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation,

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Rick Pendergraft, Trades Of The Day

Rick Pendergraft has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick's analysis process includes fundamental, sentiment and technical analysis.