One of the most interesting “smart money” trades we came across yesterday was with iShares MSCI Emerging Markets ETF (NYSE: EEM).
If you’re new here, a “smart money” trade is a relatively large volume option trade most likely made by a pro trader. The idea is to analyze unusual options activity, identify an interesting “smart money” trade, and then make our best guess as to:
- Which direction the trader thinks the stock is headed
- How much they think it will rise (or fall), and
- In what time frame this will all happen.
If we like what we see after putting all these pieces together, we can mimic the “smart money” trade (on a smaller scale), and potentially ride alongside our pro trader to profits. With all this in mind…
A Pro Trader Just Bet $1,280,000 that EEM Will Continue to Climb in the Next 8 Weeks
On Tuesday, October 19, 2021, a pro trader seems to have bought 20,000 of the December 17, 2021, $54 call options on EEM for $0.64 per share. Her outlay was $1,280,000.
EEM – Option Trade
The trade’s breakeven point is at $54.64, meaning that EEM needs to rise to $54.64 for the call option trade to break even. This is a nearly 4% return from the stock’s previous close of $52.50. And then for every $1 the stock rises above $54.64, our “smart money” trader will make $2,000,000!
On analyzing the weekly chart of EEM, the stock seems to have broken out of a pennant pattern (marked as blue color lines). It is also trading above a gap support area (marked as a green color dotted line), and a long-term support area (marked as pink color dotted line). These would now act as additional levels of support for the stock. All this makes it likely our pro trader is bullish on EEM.
EEM – Weekly Chart
This lends credence to our conclusion that the pro bought these call options, as opposed to selling them.
If you agree and would like to mimic this trade, here’s how:
Buy to open the December 17, 2021, $54 call options on EEM for $0.64 or better.
As always, depending on your risk appetite, do remember to set a stop-loss for the options trade to avoid significant losses.
Happy Trading!
— Trades of The Day Research Team