A few days ago, I mentioned I was interested in adding some international exposure again. I didn’t want to go back with EEM, my previous go-to international play that focused on emerging markets. I expect Europe to outperform emerging markets as the EU recovery begins. I weighed a few EU ETFs and settled on FEZ. FEZ attempts to track the Euro STOXX 50 Index and has a heavy (24.77% as of today) allocation to Financial Services and Healthcare (12.05%). If the economy in the European Union is truly recovering, the financial sector should outperform the rest of the economy. Just as in the US, the EU population is aging and I expect the healthcare sector to have a strong future. I didn’t want to go 100% into either of these sectors and figured the broader ETF gave me better diversification.
While FEZ was trading at $36.11, I sold two FEZ November $36 naked puts for $1.75 each and received $348.46 after paying $1.54 in commission. The downside seems somewhat limited in FEZ. From a technical view, the chart looks like it favors the bulls, although it could face resistance around $37 at the trend line of higher highs. The worst case might be that FEZ is stuck in a wide trading channel between the high $36 range and $32 or $33 on the downside. This trade can handle a bounce between those edges. I might sit on a paper loss briefly, but should bounce back to a gain. If I’m right on the direction of the EU, I won’t even take an assignment.
The fundamentals should help also. The trailing P/E ratio is only 12 according to Yahoo! Finance and it is yielding 3.58%. Both of these inputs should help offer support on the next dip. If earnings improve some, the shares will be forced higher on a value play and I expect some multiple expansion too, just as we’ve had in the US during our recovery. The expense ratio (0.29%) is relatively cheap for an international ETF.
I chose this strike after starting with an order at November $35, but when FEZ moved higher and my order didn’t hit, I opted to raise the strike and increase my premium intake. The $36 strike raises my breakeven point by about $0.65 and increases my potential return by nearly 1%. I chose to take the slightly bigger risk for a couple of reasons. First, these two puts only risk $6,851.54, a small portion of my account. If the trade goes against me, I can handle losing 10% beyond my cushion without affecting my account much. Second, I’ve been more conservative with my planned gains recently by targeting options with lower returns and lower probabilities of assignments. I felt I needed to add in a small position that pushed for a little more.
I’ll add to this position if I think it’s going my way, but since FEZ is new for me, I want to follow it a little longer before being aggressive with too much of my money on the line. I might even add to it on extended weakness. FEZ bottomed out at $32.07 in June. I’d be sitting on a $438 paper loss at this level and might do well to sell new naked puts along with covered calls if assigned shares while it was down 13% from its recent high.
FEZ Naked Put Risk/Reward Breakdown
- Potential profit: $348.46
- Potential return: 5.09%, 17.1% annualized
- Breakeven price: $34.26
- Downside protection: 5.13%
- Recent high: $36.86 on 5/22/13
- Cushion from recent high: 7.06%
- Expected support: $35.60, then at any of the multiple moving averages that FEZ will have to cross before it gets to its 200-day moving average around $34.20, which is just below my breakeven price.
- Position close goal/limit: Plan to stick with it through expiration and take assignment for long-term hold. My cost should be low enough that I can manage the position with covered calls if I have to.