Next week, specifically Tuesday April 21st, CBOE will roll out option trading on two indexes calculated by MSCI. The MSCI EAFE (Europe, Australasia, and Far East) and MSCI Emerging Markets (EEM) Index will be the first two of several index option markets based on the MSCI family of indexes that will have listed options available for trading at CBOE. These two new markets will give money managers an efficient method for managing risk exposure to equity markets outside the United States. There will also be new opportunities for index option traders.

Conventional wisdom is that global equity markets tend to trend together. However, I did some digging on the relative performance of both the EAFE and EEM versus the S&P 500 (SPX). I expected some differences in performance, but was actually surprised at how wide these divergences have been in the past.

First, let’s take a look at the S&P 500 versus the EAFE Index. Below is a monthly price chart for these two indexes covering January 2000 through March 2015. Recently the two markets have trended together, but throughout the middle of the chart (2003 to 2008) there is definitely disconnected performance.

MXEA Chart


To break things down a little more, and match up with a trader time frame, I broke down all 183 monthly performance observations from 2000 through the first quarter of this year. The histogram below breaks up monthly relative performance in 1% ‘buckets’ over the same time period as the price chart above. Specifically the relative performance is measured by subtracting EAFE’s from the percent change for SPX that month. For example the 1% ‘bucket’ shows the percent months where SPX was higher by a range of 0.5% to 1.5% than the EAFE.

MXEA Histogram


Note that the 0% range has only occurred about 17% of months over the last 15 plus years. There have also been several months where the performance difference has been more than 3% in either direction. Not only do these markets diverge, but there are different trading opportunities in each market.

The difference between SPX and the MSCI Emerging Markets Index is even more pronounced than witness when comparing SPX and EAFE.  This shows up well in the monthly performance chart below. Even casual market observers know that the emerging market sector has lagged developed markets over the past few years, but note that there are time periods where EEM has been more in favor than SPX (2003 - 2007 for instance).

MXEF Chart

Finally, note the divergence in monthly performance between SPX and EEM in the following chart which has a much wider range than the SPX - EAFE monthly comparison above. Only about 12% of months have resulted in SPX and EEM performing in line with each other and the range of divergences is pretty wide with some differences of over 10% on both ends of the spectrum.

MXEF Histogram

As MSCI index option trading commences next week there are going to be plenty of new trading opportunities. This may be from relative performance ideas or a market outlook for different areas in the international arena. We’ll keep an eye on these new markets and definitely continue to highlight large trades along with the performance of these two new option markets relative to the S&P 500.

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