Option players step up portfolio insurance in emerging market ETFs

Fri Jun 14, 2013 3:58am IST

Stocks

   

(Reuters) - Many participants in the U.S. options market appear to be stepping up their portfolio insurance in some international exchange-traded funds to offset concerns about the short-term outlook for global markets.

Strategists have noticed increased buying activity in downside puts in ETFs covering emerging markets as those markets have dropped substantially in recent weeks.

"We have seen a lot of weakness in the emerging markets and the heavy put buying suggests traders are hedging themselves for potential continued trouble in global markets over the next few months," said Ryan Detrick, senior technical strategist at options research firm Schaeffer's Investment Research.

Traders often use options in ETFs as part of strategies and hedging techniques to protect stock positions.

The put activity has been most active in the iShares MSCI Emerging Markets fund (EEM.P) and Vanguard FTSE Emerging Markets fund (VWO.P), given the weak emerging markets.

Both funds have both lost nearly 10 percent since May 8.

"We do sense that a higher level of concern has entered global markets," said Alec Levine, equity derivatives strategist at Newedge Group SA in New York.

Stock markets in China, Australia and Brazil have all fallen sharply since mid-May as investors worry about reduced support worldwide from central banks and China's economic growth.

"One of the problems is that in the Asia-Pacific region, there is insufficient demand for commodities from China, causing adjustments from Australia and Brazil," said Jared Woodard, a principal of options research firm Condor Options in Forest, Virginia.

Newedge's Levine noted investors have been buying puts and put spreads on the EEM, VWO and iShares FTSE/Xinhua China 25 Index fund (FXI.P) over the past month due to the slowdown in emerging markets economies, notably China.

Overall volume on the EEM fund on Thursday was 2.5 times the daily average, with 658,000 puts and 210,000 calls changing hands, according to options analytics firm Trade Alert. Part of that turnover was driven by a large put trade as an investor braced for additional losses in the emerging markets.

During the session, the August $37-$39 put spread on the EEM traded 235,379 times for a total net premium of 68 cents. The investor sold August $39 puts at a profit and rolled the position to buy lower strike August $37 strike puts, looking for a move below $37 in the fund by expiration, said Frederic Ruffy. WhatsTrading.com options strategist.

"Big block buyers have been active in June, July and August downside puts in the two ETFs since late May and reaping substantial profits amid increasing volatility across global financial markets," Ruffy said.

Over the past 10 trading days, 3.53 puts have traded for every one call in the EEM fund as a new position on three U.S. options exchanges, data from Schaeffer's Investment Research shows.

What is even more significant is that the open interest on the VWO fund shows 218,650 puts compared with 15,141 calls, resulting in a ratio of 14.44 puts for every one call outstanding for near-term option expirations, Detrick said.

Shares of the EEM, which tracks the equity performance of emerging markets such as Brazil, Russia, India and China, rose 2.09 percent to end at $39.93. The VWO fund closed 2.30 percent higher at $40.37.

(Reporting by Doris Frankel in Chicago; Editing by Dan Grebler)

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Canada Shooting

Canada Shooting

Attack on parliament, killing of soldier stun Canada's capital.  Full Article 

Earnings Season

Earnings Season

Wipro sees rosier end to year as U.S. clients spend.  Full Article 

Business Climate

Business Climate

Fears for tough penalties grow as India cleans up business  Full Article 

New Email Service

New Email Service

Google launches new email service dubbed "Inbox".  Full Article 

DLF Appeals

DLF Appeals

DLF seeks interim relief from capital market ban  Full Article 

Falling Oil Prices

Falling Oil Prices

Indian consumers respond to softer oil, food prices  Full Article 

Book Keeping

Book Keeping

RBI fires warning shots on companies' lack of FX hedging.  Full Article 

Policy Repo Rate

Policy Repo Rate

Most external members suggested rate cut in RBI's Sept review.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage