Chart of the Day – $EEM: Emerging Volatility?

by Dan June 12, 2014 3:49 pm • Commentary

The emerging market etf EEM has been a fabulously popular trading vehicle over the last few years as most economies in the western world have for all intents and purposes had their volatility sucked out of them by backstopping central banks, while less credible central banks in the emerging world have had a harder time, resulting in greater market volatility in multiple asset classes like credit, currencies, commodities and obviously equities.

The three year chart below of the EEM shows the more than 20% range the etf has banged around in during that time period, largely the result of the prevailing view of whether or not China sees a hard or soft landing:

EEM 3yr chart from Bloomberg
EEM 3yr chart from Bloomberg

I obviously have no clue what sort of bottom is in the cards for China’s declining GDP growth but it doesn’t take much of a technician to see that EEM could be very near a great spot to make a contrarian bearish bet.

The three chart below of 30 day at the money implied vol of EEM shows just how cheap options prices are for those looking to make directional trades in the etf:

 

EEM 3 year chart of 30 day at the money IV from Bloomberg
EEM 3 year chart of 30 day at the money IV from Bloomberg

To put that in context, if you wanted to make a non-directional view that EEM was going to break one way or the other over the course of the summer you could buy the Sept 43.50 straddle (long the put and the call) for less than 7% of the underlying etf price (around $3 right now).  While that appears expensive from a percentage standpoint I think it is safe to say that the EEM will have at least one $3 move in either direction between now and Sept expiration. Especially considering the etf is now at that upper band and will likely sell off in similar fashion within that band or breakout to new highs.

Either way, the index looks poised to move from this spot.