The $8 Million Bullish EEM Options Trade

Call buying is nearing peak levels on the emerging market fund

Nov 28, 2017 at 2:18 PM
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Bullish options betting is picking up on the iShares MSCI Emerging Markets ETF (EEM) today, with the global exchange-traded fund (ETF) up 1% at $47.49. At last check, 165,000 EEM calls were on the tape -- two times what's typically seen at this point in the day -- compared to around 64,000 puts, about half the expected intraday amount. It looks like one trader is betting on an extended surge for emerging markets through the first quarter of next year, as evidenced by a massive call buy that crossed earlier.

Specifically, 58,036 March 47.50 calls changed hands shortly before noon ET for $1.389 apiece. The block was marked "opening" at Trade-Alert, and crossed closer to the ask price -- suggesting the calls were purchased for an initial cash outlay of $8.06 million (number of contracts * premium paid * 100 shares per contract). This is the most the call buyer stands to lose, should EEM settle of the strike at March options expiration. Profit, meanwhile, will accumulate on a move north of breakeven at $48.889 (strike plus premium paid), territory not charted since May 2011.

Widening the sentiment scope reveals that call buyers have been blasting EEM at an unusual pace in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculative traders have bought to open 170,909 calls over the past 10 sessions, compared to 120,451 puts. The resultant call/put volume ratio of 1.42 ranks higher than 98% of all comparable readings taken int he past year, pointing to elevated demand for calls over puts.

Most of this action appears to centered at the December 49 call when EEM was carving out new multi-year highs, and was likely tied to shares. Nevertheless, it's an attractive time to be purchasing premium on short-term EEM calls. For starters, the fund's Schaeffer's Volatility Index (SVI) of 15% ranks in the 67th annual percentile, indicating low volatility expectations are being priced into near-term contracts.

Plus, despite EEM's surge up the charts, call options are extremely cheap relative to their put counterparts. Most recently, the ETF's 30-day implied volatility skew was perched at 28%, in the 93rd annual percentile.

Given the fund's impressive technical performance, it's really not too surprising to see so much optimism priced in. Year-to-date, EEM has rallied 35%. Plus, the shares hit a six-year high of $47.93 on Nov. 22, and are boasting a month-to-date gain of 2.1% -- stronger than their average November return of 0.1% since the ETF's inception.

Part of this upside has likely been due to a steady stream of inflows in 2017, with showing net EEM inflows of more than $3.4 billion since the start of the year. And as recently as last weekend, a Barron's cover took a deeper dive into "How to Play Emerging Markets Now" following the fund's massive run up the charts.



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