Inside the 6-Figure Options Bet Against Emerging Markets ETF EEM

Emerging markets ETF EEM has been hot in recent months, but one options trader is betting big against the security

Apr 5, 2017 at 11:29 AM
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There's been increasing focus on international stock markets in recent weeks, as some traders look outside the U.S. for "more attractive" investing opportunities. This has put the iShares MSCI Emerging Markets ETF (EEM) in the spotlight, with the exchange-traded fund's (ETF) post-Fed rally attracting a slew of bullish options trading. However, not everyone is buying into the EEM buzz, as evidenced by one major bearish options trade that crossed on Tuesday. 

Breaking Down the Big Put Spread on EEM

Specifically, Trade-Alert is highlighting a large put spread that crossed yesterday afternoon involving the May 36.50 and 37 puts. It appears one trader sold to open 155,154 contracts of the May 36.50 put for $0.15, while simultaneously buying to open 155,154 contracts of the May 37 put for $0.21 -- meaning his or her initial cash outlay was roughly $931,000 ($0.21 - $0.15 * 100 shares per contract). As such, this put spread trader is betting on EEM falling to $36.50 or lower before the options expire on Friday, May 19. 

While the ETF has seen an influx of call buying in recent weeks, put buying has remained the dominant trend. For example, more than twice as many puts have been purchased for every call during the past two weeks at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). And so far today, EEM's put/call ratio stands at 3.44 -- in the 86th annual percentile.

Moreover, it's actually a great time to buy EEM options. This is based on the exchange-traded fund's Schaeffer's Volatility Index (SVI) of 13%, which ranks just 3 percentage points from an annual low. In other words, volatility expectations on near-term options are unusually low at the moment. 

EEM Shows Technical Strength

As alluded to, iShares MSCI Emerging Markets ETF (EEM) has been hot in recent months. In fact, the ETF has rallied 17.4% since its December low to trade at $39.84. Plus, EEM just hit an annual high of $40.23 on March 21, and closed a second consecutive month atop its formerly resistant 36-month, or three-year, moving average. 

emerging markets etf


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