Despite today’s fall in VIX, volatility is at 5 year highs. This is a great place to reinforce macro GEM views and seize upon either price weakness or get paid from volatility. Emerging markets – especially when analyzed across specific country lines are not a fad, or even a bubble, but a 10 year growth story. Despite what I can argue on the “decoupling” from developed markets, GEM will trade in sympathy with global markets especially during extraordinary market events. Yes, earnings growth could slow from 15-20% to 5-10% and GDP will be revised down 75-200bps in GEM in 2008 but the top core markets are growing organically and can expect significant state spending to buffer external factors.
Sell volatility today to get implicitly long out 6 months. Sell 6 month out of the money Puts in down 10-20% in core GEM ETFs, especially those who are running annualized vol north of 45%.
Annualized volatility in EEM(GEM MSCI) is 45%, EWZ (Brazil) 52%, FXI China 60%
Many of these country ETFs are already down 20% from their highs; by taking a view on an index you are removing company factor risk which is a potential concern for any company out 6 months. By selling the obligation to buy the ETF (a view on a country) at a price you are happy to own it(down another 10%?, 20%) you are getting paid now whether you get exercised or not. Your risk is that you don’t get exercised and your opportunity cost in never actually owning the mkt as it trades higher(and you wanted to own it at that level) without hitting your strike.
