This last week the open interest for options on the MSCI Emerging Markets Index (MXEF) rose above 600 contacts for the first time. Over the past year several institutional investors have expressed interest in the potential for a liquid MXEF options contract, particularly because the MXEF options contract is cash-settled and has a notional size that is about 24 times larger than options on the EEM ETF.
VOLATILITY SKEW FOR MXEF OPTIONS
The volatility skew chart below shows that Bloomberg has estimated that the recent 30-day implied volatility was higher for MXEF than for the MXEA and SPX options at all nine strike prices shown; this fact could appeal to options writers who wish to generate more premium.
PRICE CHARTS OVER THE PAST YEAR
The one-year daily closing price charts below show that –
- The prices of the MXEF Index fell from a high of 1067.01 on April 28, 2015, to 721.65 on February 2, 2016 (a decline of 32%).
- The VXEEM volatility index hit a high of 55.17 on August 24, 2015, while there were fears about the falling stock prices in China.
After seeing these charts with volatility and declining stock prices, investors could explore the possibility of adding MXEF options as a tool for risk management and income enhancement.
IMPORTANT INDEXES – CAPITALIZATION AND ASSETS UNDER MANAGEMENT
In mid-2015 the total market capitalizations were $13 trillion for MSCI EAFE (MXEA) and $4 trillion for MXEF. In 2014 the estimated amount of assets under management tracking the indexes was $2 trillion for MSCI EAFE and $1.7 trillion for the MXEF Index.
KEY FEATURES OF MXEF OPTIONS
Key features of MXEF options include:
- Large Notional Size — around $72,100 per contract with the MXEF index at 721 (approximately 24 times that of options on the EEM ETF)
- No Early Exercise of MXEA Options – European-style Exercise
- Cash-settlement with No Delivery of Stocks or ETFs
- Price and Quote Transparency with Competitive Auction Markets for Leading Option Contracts
- Daily Mark-to-market for SEC-regulated securities
- Clearance of Transactions is guaranteed by the Options Clearing Corporation
- Tax Treatment under section 1256 of the Tax Code. Profit and loss on transactions in certain exchange-traded options, including MXEF options, may be entitled to be taxed at a rate equal to 60% long-term and 40% short-term capital gain or loss, provided that the investor involved and the strategy employed satisfy the criteria of the U.S. Tax Code.
To learn more about options on MSCI indexes at CBOE, please visit www.cboe.com/MSCI.