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Emerging Market ETFs Re-Emerge


After rally, options go international.


Remember a few years ago -- before the plethora of 2- and 3-times levered exchange-traded funds were around -- the top choice for traders looking for big moves were the ETFs on the emerging markets?

The interest in those products had faded along with those markets. But yesterday's rally caused a resurgence in option activity in several of those names.

For example, the iShares FTSE/Xinhua China 25 (FXI) rose 7.5% to $25.47 and saw over 12,000 option contracts trade. The most notable transaction came in the form of a straddle, in which someone sold about 3,000 of the May $26 strike for a net credit of about $5.20. That means the trader is hoping shares stay within 20% range over the next 10 weeks and/or implied volatility comes off its current 60% level.

The iShares Trust MSCI EAFE Index Fund (EFA), which includes Eastern European, Australian and Indian markets, rallied more than 7% to $33.80 and saw over 50,000 option contracts trade. That's about 20 times the 3-month average daily volume. Again, the most notable transaction came in the form of a straddle. But this time, someone appeared to be buying the April $32 line for a net debit of $4.10. This trader is betting that the index will move more than 12% in the next 5 weeks.

The iShares MSCI Brazil Index Fund (EWZ) popped 6.75% to $36 a share. In this case, a trader seems to have taken a decidedly bullish posture and purchased 12,000 of the March $36 calls for about $1.10 a contract.

A little further out, someone established a bearish butterfly in the April puts buying the 28/31/34 "fly," buying 30,000 contracts of the "wings" and selling 60,000 contracts of the $31 strike or "body" for net debit of $0.35. The position has a maximum profit of $2.65 if shares of EWZ land at $31 on the April expiration.

Even Japan joined the action: Its iShares (EWJ) rose 5.5% to $7.25. Imagine: Someone thinks it's time to buy Japanese, selling 15,000 of the $6 puts to help finance the purchase of $15,000 of the April $9 calls. All said, the net debit was just a nickel.

The position now needs the MSCI Japan Index to tack on another 10% to hit its $8.05 break-even point. In isolation, this position seems rather risky, so it might be someone that's short Japanese stocks creating an inexpensive hedge.

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