The Week in Emerging Market Volatility – 11/17 – 11/21

At The Options Institute we travel extensively and the travel is very seasonal. Between Labor Day and Thanksgiving each of the instructors are on the road almost once a week. Just for the heck of it, I scanned my airline frequent flier account and I’ve racked up 19,825 miles between those two holidays this year on behalf of CBOE. My point behind this is not that we log a lot of frequent flier miles, it is that this is a difficult time of year to keep up with what is going on in the markets.

When I see headlines about Brazil I make a mental note since each weekend I like to have something to say about that market in respect to VXEWZ. This past week I saw a couple of what would be considered very bearish comments regarding Brazil. Needless to say, I was shocked when I saw that the iShares MSCI Brazil Capped ETF (EWZ) was up almost 12% last week. That shock turned into a little confusion when I saw VXEWZ rose over 5% as well last week.


Before moving on to the futures price action, I came across a EWZ trade on Friday that expects a pretty big move to the upside for EWZ over the next few weeks. On Friday there was a buyer of 20,000 EWZ Dec 52 Calls for 0.08 that also sold 20,000 EWZ Dec 54 Calls at 0.04 and a net cost of 0.04. Note the payoff diagram below – for EWZ to reach the break-even point a move of 18.4% will be needed. A rally or 22.9% or more between now and December 19th would result in a profit of 1.96.


VXEEM didn’t get any love or attention above so I’ll talk about the term structure for VXEEM first. It is normal and dull. Now on to the exciting market, VXEWZ is still in backwardation which usually can be taken as uncertainty with a focus on the downside for the underlying market. At least that is normally the case in the equity index world. However, in this instance is could be taken as EWZ is either going to rally or fall apart (again) into the end of the year. At least one trader (see above) is hoping for a big move to the upside.