To state the obvious, downward volatility in Chinese stocks and their currency is at the core of of the S&P 500’s (SPX) year to date decline of 5%. And related to that, for most days this week the iShares Large Cap China etf (FXI) and its options have been some of the most heavily traded. But today, EEM, the Emerging Market etf stole some of the show from an options volume standpoint. This is likely related the etf’s “almost 60% Asia weight with 2/3rd of that China directly or indirectly” as my my co-contributor on the TickerDistrict Tim Seymour highlighted on Monday.
EEM options volume is more than 2x average daily with puts outnumbering calls 4 to 1. The single largest options trade of the day was a buy of 100k of the June 25 puts when the etf was $30.20, with the buyer paying 62 cents to open, or $6.2 million in premium. This trade was attached to a roll down and out as 90,000 of the March 27 puts which were sold to close at the same time, at 48 cents. The new put position in June break-even at $24.20, down about 20% from the trading level.
The EEM is down 32% from its 52 week highs made in April, making fresh 52 week and more than 6 year lows. Interestingly, the EEM topped out two months before Chinese stocks:
On a longer term basis, looking at the 1o year chart, $30 could be a thing, a level it closed below today. The main point is that there is little support until $25:
From a vol perspective, 30 day at the money implied vol (blue line – the price of options) has had a sharp rise in the last couple weeks to about 28%, which one would expect, despite realized vol (white line – how much the etf is moving) remaining fairly suppressed at 21%. A quick pick up movement could cause options prices with a 2 handle to look cheap.
I would add one last point about this bearish roll. I would not read to much into it on an outright basis as every month or two we see similar action, sometimes with the roll reaching 250,000 contracts. This is likely a hedge against a long portfolio of emerging market stocks, or the investor sees EEM as a suitable hedging vehicle.