Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

ETFs: Smooth Sailing Gives Way to Choppy Waters


Options traders anticipate volatility in exchange-traded funds.

Editor's Note: This post is by David Russell, of OptionMONSTER.

After 6 weeks of smooth sailing, options traders are anticipating volatility in emerging-market exchange-traded funds.

Activity spiked yesterday in the MSCI Brazil Index (EWZ) and MSCI Emerging Markets Index (EEM), which both witnessed above-average volume. In 1 of the session's largest trades, an investor purchased 33,000 contracts of EEM May 28 puts for $1.69 and an equal number of May 28 calls for $1.49.

This so-called straddle trade will be profitable if EEM falls below $24.82, or rises above $31.18. EEM rose 1.45% yesterday to close at $28.07. (See optionMONSTER's Education section.)

Another large transaction showed how 1 trader bet on a limited decline at very low cost. This strategy bought 5,000 May 26 puts in EEM for $0.96 and sold 10,000 May 24 puts at an average price of $0.465. By selling more puts at the lower strike, the cost was reduced to just $15,000 before commissions.

The maximum return would be $1 million if EEM closes at $24 on expiration. If it drops below $22, however, the trade would become unprofitable because of the greater short exposure at the lower strike.

The trade differs from a traditional spread, which is perfectly hedged because it includes an equal number of short and long positions. The transaction was similar to a large bearish position taken yesterday against the MSCI International ETF (EFA) - which focuses on developed countries like the United Kingdom and Japan.

Yesterday's activity could reflect concern about a pullback in stocks. If the market were to retreat, international and emerging-market equities would likely post larger losses because they tend to make more dramatic moves than US shares. Since the market's low last month, EEM has rallied 35%, compared with 25% for both the EFA and the S&P 500.

In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos