Did Yellen inspire bearish emerging markets options trade?

A 200,000 contract bearish put spread appeared in an emerging market ETF in the aftermath of the release of Fed Chair Janet Yellen’s semi-annual testimony to Congress.

In her statement, the Fed Chairman further hedged just about any outcome for the U.S. economy, which she said still needs time to complete its recovery. Yellen pointed out potential strains in valuation measures across riskier corporate bonds, where yields have compressed to lower risk corporates and government issues.

But she also pointed out stretched valuations on smaller firms, citing social media and biotech names even after a notable first-quarter correction in such names. The 200,000 contract put spread appeared in the iShares MSCI Emerging Markets ETF (Ticker: EEM) whose share price fell by 0.34% following the trade to $44.09. The EEM fits into the riskier group given the sensitivity of the emerging markets to any correction in U.S. stocks. Throw in to the mix the fact that yields are edging slightly higher across the U.S. yield curve, despite an initial push lower in response to a dovish delivery, and the alarm bells might be ringing in some investors’ ears. 

A year ago when Ben Bernanke floated the notion of bond tapering, the contagion effect drove up emerging market government bond yields preceding an inevitable tumble for stocks sensitive to the health of the world’s major economy. The investor paid a net premium of 34-cents to purchase October’s expiring 40.0 strike puts while simultaneously selling the lower 37.0 strike puts. The trade may gain in value should the share price of the EEM trickle towards the upper 40.0 strike, which is currently about 10% below the current level.

Start-of-the year selling drove the EEM to about $37.00 and it rose above the $40.00 level in March and has since put in a recovery high at $44.32 on Tuesday of this week ahead of Janet Yellen’s speech.  

 

Chart: Emerging market stocks fell as yields rose one-year ago

 

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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