July is going to be an interesting month for FAZ. FAZ, which has only been around for less than a year, has already experienced three distinct market environments: a strong bear market with high volatility, a strong bull market, and, recently, a sideways markets primarily marked by low volatility.
July most certainly will be the turning point for FAZ. Most financial institutions report earnings, and, new (most likely surprisingly bad) economic data will be released. These factors ensure higher volatility, which is an important factor to prevent exponential decay in FAZ's price. Whatever direction the market takes, however, it will have a profound effect on FAZ’s price. If the bull market continues (which is highly unlikely), its price will drift towards $2.00 and lower. If a bear market appears (which is highly likely), its price will move into the $6.00 range, but most likely much higher. If the market remains in its current state, FAZ’s price will move to $5.94.
Here is my model for July 18 price projections (when July options expire). Note: the upper and lower price ranges assume higher volatility.
What does this mean? Absent a continuing bull market on financials, it is highly probable that FAZ will reach $6.00. This provides a great option trade, selling covered FAZ July $6.00 calls. Assuming that the option gets called in, which is highly probable, it yields a one-month return of 16%.
A more aggressive strategy would be to buy FAZ July $6.00 calls or FAZ July $7.50 calls. Each of these strategies has a 49% and 47% chance of breaking even respectively.
Disclosure: Long FAZ.