The risk premium as priced in by options on the iShares MSCI Emerging Markets ETF (EEM – 42.94) continues to come under pressure as EEM has been holding its own versus developed markets this year. As seem below VXEEM gapped lower on Monday and stayed low relative to the previous week even as the equity market made some participants a bit nervous later in the week.
The start of the emerging market world this year has been Brazil. The iShares Brazil Capped ETF (EWZ – 49.28) gained 1.5% last week and is now up 10% on the year. VXEWZ finally seems to be buying into the bullish market action and VXEWZ finished the week down over 8%.
Both VXEEM and VXEWZ curves continue to maintain ‘normal’ contango shaped term structure charts with the drop in the respective spot volatility indexes. VXEEM is also getting a lot of trading attention with the futures open interest around 2000 contracts as of Friday.
Finally, I did come across a big bullish (and complex) spread trade on EEM that was traded mid-day Thursday. Looking out past the summer there was a seller of both the EEM Sep 39.00 Put at 0.81 and EEM Sep 44.50 Call at 0.60 who used those proceeds to purchase the EEM Sep 43.00 Call at 1.22. Note that this trade was initiated for a credit of 0.19 (0.81 + 0.60 – 1.22) excluding commissions. That 0.19 is the resulting profit if EEM is between 39.00 and 43.00 on the close of the third Friday in September. The risk is to the downside and as EEM trades below 38.81 the trade incurs losses and there is no safety net below. The best case scenario involves EEM at 44.50 or higher where the trade profit would be equal to 1.69. With all those moving parts a payoff diagram is warranted and appears below –