Emerging market equities lead the charge in 2016 until Tuesday’s U.S. Presidential election.  Donald Trump’s victory altered that course as the markets react to potential changes in global trade.  Within the past two days, S&P 500 moves towards it’s 52-week high (2,193.81) and the FTSE Emerging Index declined by 5% from its record high from Sept. 8th (467.34) .  Although it may be too early to forecast trends in the Emerging Markets vs U.S. Large Caps, investors have an opportunity to trade on volatility.

Options on the FTSE Emerging Index (Ticker: FTEM)

FTSE Emerging Index is a benchmark widely used to measure the performance of the most liquid companies in the emerging markets including large and mid-cap companies from 22 countries.  On September 26, 2016, CBOE launched cash-settled options on the FTSE Emerging Index.

Highlights of Options Contract:

Root Ticker                                        FTEM Multiplier                                          $100 Exercise Style                                    European Expiration Months                           Monthly & LEAPs Expiration Date                                Third Friday AM/PM Settlement                          PM Settled Settlement upon Exercise              Cash Settled Bloomberg Ticker                             FTAG01 Thomson Reuters Ticker                 FTEM

CBOE Emerging Market ETF Volatility Index

The CBOE Emerging Market ETF Volatility Index (VXEEM) is a measure of 30 day implied volatility.  For perspective, the long term average for VXEEM 24.45, but the index is now at 26.78.  This is high relative to the average for VXEEM and is at an extreme relative to US volatiltiy as indicated by VIX which closed at 14.74 today.

vxeem

Source: Bloomberg

FTEM BuyWrite or PutWrite Strategy

Cash-settled index options typically have a high notional value compared to their ETF counterparts.  In this case, the FTEM options notional value based on tonight’s close is (444.11 * $100) $44, 441.  Holders of the comparable ETF – Vanguard FTSE Emerging Markets (Ticker: VWO) could capture premium by creating a BuyWrite or PutWrite position.  The long exposure for a BuyWrite would use the underlying ETF given VWO’s value is equal to or greater than the notional value on the option FTEM.

Margin - CBOE Regulatory Circular RG15-183 notes that CBOE rules allow a short position in a cash-settled-index option established and carried in a margin account to receive covered margin treatment, if the short option position is offset in the same account by an equivalent position in an index-tracking ETF that is based on the same index that underlies the short option(s).

In order to receive covered margin treatment, the market value of the offsetting ETF position must be equivalent or exceed the current aggregate index value of the option being covered. One should note that not all ETFs are managed so as to maintain a share price that is a constant fraction (e.g., 1/10 th, 1/100 th, 1/1,000 th, etc.) of the index being tracked.

For additional information on cash-settled options on FTSE Russell Indexes please visit the following CBOE microsites:

www.cboe.com/FTSERussell

www.cboe.com/FTEM

Presentation Slides from FTSE Russell/CBOE/CME Equity Index Workshop in NY (Nov. 2) may be downloaded using the link below.

Click Here for Slides