Some big options traders seem to think the pain may continue in emerging markets.
Two large strategies were detected today in the MSCI Emerging Markets ETF (EEM), which is heavily concentrated in China and East Asia. One will profit from the fund dropping further, while another simply assumes no rebound will occur.
First, the large vertical put spread was directional:
- A block of 35,000 13-September 38 puts was bought for $0.69.
- A block of 35,000 13-September 35.50 puts was sold for $0.26.
- The translates into a net cost of $0.43.
Puts fix the price where a stock can be sold. You can buy them to position for a drop or sell them to generate premium. Today’s trader did both, looking for EEM to push down through $38 to $35.50.
They’ll collect $2.50 if it does, representing a 480 percent return on the $0.43 they paid. See our Knowledge Center for more.
The second transaction occurred 90 minutes later when someone wrote about 70,000 September 40 calls. Premiums started at $1 and then fell to $0.92 as the selling continued.
Short calls are highly risky if done alone, but today’s investor probably sold the contracts against a position in the underlying shares. That indicates he or she sees little chance of significant bounce before the middle of next month.
Trade Wars Take a Toll
EEM rose 0.10 percent to $39.65 in afternoon trading. It’s barely moved all year, compared with a 15 percent gain for the S&P 500.
The reasons are fairly obvious as President Trump slaps tariffs on a range of Chinese goods. In addition to slowing the giant Asian economy, it’s contributed to a selloff in the yuan. Both of those are negative forces for EEM.
Wednesday’s bearish activity is probably the work of large institutional investors with long-term positions in Chinese and global assets. Both transactions would hedge against further drama between Washington and Beijing through the end of the summer.