Emerging Markets Strike Back

04/09/2014 8:00 am EST

Focus: OPTIONS

While the S&P 500 has been flat over the past month, the Brazil ETF has been up over 7%, so Andrew Giovinazzi of OptionPit.com offers a trade idea based on this dichotomy.

So the Friday rout in volatility did not materialize. Stocks dutifully opened higher with VIX marking lower, and then everything went the other way. Monday, the big premiums we saw in VIX futures got chewed up as VIX Apr closed just about flat with the VIX cash. The VIX line in the sand at 13% is holding much better than Qaddafi's Line of Death, and seemingly for months longer.

All we could read about in February was that emerging markets were toast and bonds were going to tank on the rising interest rates. Well, the EM's are coming back pretty strong and bonds have reversed a good part of their slide. Beside the Russian panic of three weeks ago, longer-term T-bonds are at their highs for 2014. This is on top of a near straight line of Fed bond purchase reductions. You have to hand it to the Fed to exit the bond market and leave rates lower. That is a pretty sweet trick.

chart
LivevolR www.livevol.com
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chart
LivevolR www.livevol.com
Click to Enlarge

It would seem it is really helping the EM's. Besides the Russians causing their own problems and Argentina not making the news, the EM's have staged a huge comeback in 2014. Brazil (EWZ) is on a near straight line back up (it was in 80's when Eike Battista was rich). While the PCLNs and NFLXs are taking 15-25% mark downs, the larger EM markets are staging a remarkable comeback. It will most likely continue. They are still in nowhere's ville over the last two years when the US notched some giant returns.

The Trade
I like the just OTM call time spreads in the EEM with a longer duration. It has been a solid trade for most of the year and that market has had it smacked down already. In some of the EMs that are moving more briskly, I like owning the ATM call with a protective put three to six months out. The big momentum stocks might be done sliding, but not ready for that quite yet.

Disclosure: Positions in EDC

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

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