Are Emerging Markets In Trouble?

| May 16, 2014 | 0 Comments

emerging marketsTypically, once a week (usually on Mondays), I write about unusual options trades for the week.   There’s much that can be gained by seeing what the smart money is doing in the options markets.

Sometimes, however, there are big trades which I believe are so meaningful, they deserve their own column. One of those game-changing trades occurred this week in iShares MSCI Emerging Markets Index (EEM).

EEM is one of the heaviest traded ETFs out there. It averages an absurd 67.4 million shares per day.

Basically, emerging markets have become an important asset class as nations such as China and India become extremely important to the global economy. In terms of ETFs, there’s no more popular way to trade emerging markets than EEM.

As such, when I came across a massive put trade in the EEM ETF, it was worth taking a second look at.

A trader bought 76,709 September 42 puts all at once, for $1.51 per contract. With open interest only at 421 contracts prior to the trade, it’s clearly an opening position.

First off, let’s put the trade into perspective. EEM is currently trading for $42.89. It’s just around 1% below the 52-week high of $43.52 and is still 21% above the 52-week low of $35.37. The ETF is also trading 6% above the 200-day moving average and 5% over the 50-day moving average.

Based on the technical aspects, the put trade could be a flat out bearish bet on emerging markets. The strategist may believe China or other emerging market countries are headed for a downturn over the summer.

The put buying strategy makes money if EEM drops below $40.49 by September expiration. That’s right at the 200-day moving average.

On the other hand, the odd number of contracts could suggest this trade is a massive hedge. Typically, speculative plays use round numbers… such as 75,000 instead of 76,709.

The premium spent on this trade is roughly $11.6 million. That could easily be a percentage hedge for a major emerging markets-based portfolio.

So, are emerging markets in trouble, or is someone with a huge emerging markets position just being safe?

Either way, it’s not a bad idea to keep an eye on EEM. Whether this massive trade is a hedge or a speculative bet, it’s worth watching. After all, emerging markets are currently the biggest variable driving global markets.

And just in case you’re curious, in my opinion this trade is a hedge. For me, the odd-lot trade gives it away. Regardless, that’s a boatload of cash to spend on a single position.

Yours in Profit,

Gordon Lewis

Tags: , , , ,

Category: Breaking News

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.