It’s not quite fall yet, but we’re already talking about Turkey. Specifically the Turkish lira, but if you wanted to have a turkey leg while you’re waiting for football to start back up, I wouldn’t be opposed to that. With the lira down over 45% this year this has catapulted the implied volatility rank of TUR iShares MSCI Turkey (Nasdaq: TUR) exchange-traded fund (ETF) to 100. Meaning that the options prices today are at the highest levels they’ve been over the last year.
Options prices become elevated when there are sharp drops in the underlying’s price as investors quickly buy more options to protect their investments. When prices rise quickly, they can also fall quickly once the news (and noise) surrounding the price movement event wanes.
The event causing the spike in options pricing is the political instability around Turkish president Erdogan’s economic policies. This news event prompted the TUR ETF to drop by nearly 11% on August 13, 2018. This kind of publicity brings once obscure ETFs like TUR into the fold. Today we are going to cover two trade setup ideas that will profit if Turkey manages to board the gravy train out of trouble or is heading into the deep fryer.
Let’s examine a bullish trade setup. Because options prices are so high, there’s a large demand of buyers and they’re paying a hefty premium. By selling the 17 put and buying the 15 put, the trade would take in a credit of $50 which is the max profit, with the max risk at $150. The ETF is currently trading at $19.07 so this trade’s break-even price would be $16.50 or 13.5% below the current price. The 17 put has a delta of 21 meaning that it has a 21% probability of being in the money at the September 21, 2018 expiration, but that also means a 79% probability of profit on this trade.
Or if you feel that the 10% drop is only the tip of the iceberg, selling the 21 call and buying the 23 call would set up a trade that takes in $56 in credit and risks $144. This trade setup has a 72% probability of profit according to the Tastyworks platform (my platform of choice) and a breakeven price of $21.56 which too is 13% away from the price as of this writing at $19.07.
With either of these trades, the likelihood of the options pricing coming down after the news in a few days when the Turkey news dies down is very high. These kinds of setups where trades can be structured to take in so much credit and have such a high probability of profit is rare, which makes it an excellent opportunity. But trade cautiously, with the currency crisis potentially spreading, this might not be only time Turkey is in the headlines.