Weekly MSCI Index Review – 7/7/2015

Tuesday of each week is the time we have set aside to discuss international markets on the CBOE Options Hub. Recently CBOE launched index option trading on two of the most widely followed equity market indexes that depict performance for equity markets outside the United States. The MSCI EAFE Index (MXEA) measures the performance of equities in developed markets outside of North America and the MSCI Emerging Markets Index (MXEF) focuses on emerging markets such as China, South Korea, and India.

The chart below shows the price performance for MXEA, MXEF, and the S&P 500 (SPX) through July 6, 2015. I alter the indexes to start the year at 100 so we can get an apples to apples comparison of how different classes of equities are performing this year. As of Monday MXEA is up 1.9%, MXEF is down 2.5% and SPX is 0.5% higher for the year.   I was a bit surprised to see the outperformance of MXEA relative to the other two indexes since I would assume the continuing saga out of Greece would put pressure on equity prices in Europe which comprise a big part of MXEA.


CBOE calculates volatility indexes using options on the ETFs closely associated with MXEA and MXEF. VXEFA and VXEEM are a consistent measure of 30 day implied volatility based on an outlook for MXEA and MXEF. Many traders find looking at the relative prices of different volatility indexes to determine where the option markets are anticipating risk is in the markets. The charts below compare VXEFA and VXEEEM to VIX.

VXEFA is a measure of expected volatility based on exposure to several developed markets. At times VXEFA is at a discount to VIX and at times it is quoted at a premium.   The chart below shows the ratio of VXEFA divided by VIX on a daily basis in 2015. Early this year VXEFA was at a discount to VIX which resulted in a measure below 1.00. However as of late, likely with the issues in Europe being in the forefront of trader’s minds, VXEFA has consistently been quoted at a premium to VIX and finished Monday very close to 2015 highs.


Emerging markets are perceived as riskier investments than developed markets. Due to this (justified) perception VXEEM is consistently quoted at a premium to VIX.  I was surprised to see VXEEM in the middle of this year’s range since on July 6 MXEF was down over 4% while the S&P 500 lost less than 1%.


For the second Monday in a row Greece dominated the news as the trading week began. This put particular pressure on MXEA with the index down over 2%. Following the index lower was the iShares MSCI EAFE ETF (EFA) shown on the chart below.


One trader came into the market late Monday and purchased a call spread using EFA options.  The outlook for this trade is based on EFA recovering by 2.8% between now and standard July expiration on the 17th. Specifically they were a buyer of the EFA Jul 17th 62.50 Calls at 1.14 and seller of the July 17th 64.50 Calls for 0.31 and a net cost of 0.83.