Schaeffer's Trading Floor Blog

Checking In On Emerging Markets

Dissecting the current landscape of emerging-market volatility

by 6/4/2014 7:34 AM
Stocks quoted in this article:

Looks like our current trend of calm has spread around the world. This, from Bloomberg:

Bears are unwinding options wagers against emerging-market stocks. Contracts (EEM) on an exchange-traded fund tracking countries including Brazil, Russia, India and China fell to the cheapest in a year relative to U.S. stocks, data compiled by Bloomberg showed. The iShares MSCI Emerging Markets ETF has rallied 15 percent since hitting a seven-month low in February, compared with a 10 percent gain in the Standard & Poor's 500 Index.

Are they really unwinding those bets? It depends how you look at it.

The CBOE Emerging Markets ETF Volatility Index (VXEEM) uses CBOE Volatility Index (VIX) methodology to proxy implied volatility on the iShares MSCI Emerging Markets Index (ETF) (EEM) and it has indeed taken a hit in the past month.

Schaeffer's Volatility Index (SVI) for EEM Since January 2014

But, whatever "bets" are going on in there are all going on in the puts. Here's the Schaeffer's put/call open interest ratio (SOIR) for over the past half year.

Schaeffer's put/call open interest ratio (SOIR) for EEM Since January 2014

Yes, the relative open interest in puts is at a 2014 high. On the margins, that's kind of bullish. The index is doing very well, yet no one wants to own calls here. Or, everyone wants puts. Or, a combo of those two thoughts. Whatever the case, it's a good sign.

The overall price of risk protection in EEM is rather mediocre versus the VIX. Here's how the ratio looks over the past few years. (Click on the chart below to enlarge.)

Chart of EEM_VIX Ratio Since May 2011

It's actually risen over the last month, mostly thanks to VIX getting plowed faster than VXEEM. But, over the course of time, it's generally in middle ground. And at 1.50, it seems pretty fair intuitively. Sometimes it makes more sense to compare volatility in absolute numbers as opposed to ratios, as low numbers can yield misleading results. The VXEEM premium now is about 6 points, which also sounds reasonable.

All in all, I think it's more of a mixed picture in EEM options. Volatility is definitely low, but it's really just moving in line with volatility everywhere else in the world. And don't forget, it's almost summer, which traditionally serves to dissuade options buyers even more. The stocks themselves are moving more or less with ours right now, so I don't really see much urge to play here at the moment.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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