How To Stoke EEM To Life With ETF Options

April 09, 2015

This is a weekly column focusing on ETF options by Scott Nations, a proprietary trader and financial engineer with about 20 years of experience in options. More than 128 million options on ETFs were traded in March, and because ETFs and options are among the fastest-growing financial vehicles in the world, it only makes sense to combine the two. This column highlights unusually large or interesting ETF options trades to help readers understand where traders believe a particular ETF may be headed. In doing so, Nations examines the underlying options strategy.


Tencent is not a rapper, although it would be easy to think it is 50 Cent’s younger cousin.


Rather, Tencent is China’s largest Internet service portal, according to the company’s English-language website. Tencent is also one of the top holdings of the iShares MSCI Emerging Markets ETF (EEM | B-99).


With more than $30 billion in assets under management, EEM is one of investors’ most popular ways to invest in emerging markets such as Korea, Taiwan, China, South Africa, Brazil and India.




While EEM is a common way to take advantage of expected growth in emerging markets, investors haven’t seen much growth in the value of their EEM shares over the past year.



The iShares China Large Cap ETF (FXI | B-47) has appreciated by more than 33 percent during the past year and the SPDR S&P 500 ETF (SPY | A-98) has appreciated by over 14 percent. EEM, meanwhile, is up just 2.4 percent and suffered a sickening 17.7 percent decline from September to December.


EEM bulls might believe this is the time to buy, but if you look at that drawdown and the poor relative performace in EEM, it would take a brave trader to buy a bunch of shares.


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