Buy Emerging Market Index (EEM) Calls to Position for a Rebound - MKM Partners
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MKM Partners Derivatives Strategist Jim Strugger thinks emerging market stocks could rebound following significant underperformance so far this year. For a trade, they recommend buying iShares Emerging Market Index (NYSE: EEM) August 41 strike calls.
Strugger notes that the Emerging Market Index (MFEX) has lagged the S&P 500 Index (SPX, 1639.04) by 26 percentage points in 2013. Over the same period assets EEM declined by 33% to $35 billion. Slowing economic growth in China, soft commodity markets and restrictive monetary policy in some countries, have led to the weakness. In addition, elevated volatility across asset classes induced by Japan's economic and monetary policies and speculation about the Fed, have exacerbated this trend.
The SPX is now trading 1.4x MFEX on 2014 P/E basis, which is the highest since emerging market stocks sold off sharply during the gobal financial crisis in 2008.
"With the pullback in U.S. equities likely closer to its end than beginning, we think emerging market stocks and commodities on a selective basis, could be poised to trade higher from the recent lows," Strugger said. "MKM Partners Chief Market Technician has a similar view, believing that EEM is oversold at current levels and sitting on solid support."
Strugger notes that will the sell-off implied volatility has increased across expiries and particularly in near out-of-the-money puts. Still, 3-month at-the-money implied volatility is just above 20% and toward the low end of
its range over the last several years. "So to position directionally long out a couple of months, we recommend buying August 41 strike, 32 delta calls outright for $0.67."
Strugger notes that the Emerging Market Index (MFEX) has lagged the S&P 500 Index (SPX, 1639.04) by 26 percentage points in 2013. Over the same period assets EEM declined by 33% to $35 billion. Slowing economic growth in China, soft commodity markets and restrictive monetary policy in some countries, have led to the weakness. In addition, elevated volatility across asset classes induced by Japan's economic and monetary policies and speculation about the Fed, have exacerbated this trend.
The SPX is now trading 1.4x MFEX on 2014 P/E basis, which is the highest since emerging market stocks sold off sharply during the gobal financial crisis in 2008.
"With the pullback in U.S. equities likely closer to its end than beginning, we think emerging market stocks and commodities on a selective basis, could be poised to trade higher from the recent lows," Strugger said. "MKM Partners Chief Market Technician has a similar view, believing that EEM is oversold at current levels and sitting on solid support."
Strugger notes that will the sell-off implied volatility has increased across expiries and particularly in near out-of-the-money puts. Still, 3-month at-the-money implied volatility is just above 20% and toward the low end of
its range over the last several years. "So to position directionally long out a couple of months, we recommend buying August 41 strike, 32 delta calls outright for $0.67."
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