Block Trade Analysis – EEM Ratio Spread

Late Wednesday a big trader came in who appears to have a pretty specific opinion about the Emerging Market Sector.   With less than an hour to go in the trading day there was a buyer of 25,000 EEM May 43.50 Calls at 0.66 who then also sold 50,000 EEM May 44.50 Calls for 0.26. The net result was a trade that does well if EEM moves higher over the next few weeks but not too high. The payoff diagram below shows how this works with a discussion to follow.

EEM PO

If held to expiration, this trade turns a profit between 43.64 and 45.36. The best case scenario would be EEM closing at 44.50. At this level the 43.50 Calls are worth 1.00 and the 44.50 Calls expire with no value. Above 44.50 this position starts to lose value and the losses can continue as this trader is short twice as many 44.50 Calls as he is long of the 43.50’s.

Finally, if you have an interest in the Emerging Market sector, check out www.cboe.com/msci to learn more about index options on the MSCI Emerging Markets Index as well as options on the MSCI EAFE Index.