This Week in Emerging Market Volatility – 4/11/2014

Before talking about the volatility markets I did want to point out an emerging market trade that caught my eye on Friday.  Mid-morning there was a buyer of 12,000 EEM Jun 40.00 Calls at 2.62 that also sold 12,000 EEM Jun 43.50 Calls for 0.72 and a net cost of 1.90.  EEM was around 41.65 at the time of this trade and ended up closing at 41.83.  The payoff at June expiration is below –

EEM Payoff

This trade appears to be based on an outlook that the iShares MSCI Emerging Markets ETF (EEM – 41.83) will rise 4% or more between now and June 20th.  A 4% move puts EEM pretty close to the short strike of 43.50.  The break-even level is 41.90, just pennies from Friday’s close.

The S&P 500 is now down 1.77% for 2014, but you would not know that from watching emerging markets.  EEM is flat for 2014 and the Brazilian market is the champ with the iShares MSCI Emerging Market ETF (EEM – 41.83) up 6% for the year.  However, despite EWZ putting up some pretty strong performance lately implied volatility of EEM options as measured by the CBOE Brazil ETF Volatility Index (VXEWZ – 30.35) remains at elevated levels and the flat curve is also displaying some real uncertainty around what is next for the host of the 2014 World Cup.