The multimillion-dollar bet against emerging markets
Investors haven't shown much love for emerging markets lately. But one big trader just bet $8 million that it will get even worse for the iShares MSCI Emerging Markets ETF (EEM).
One of the largest option trades placed on Monday was the massive purchase of the December EEM 35/27 put spread for 78 cents. The spread traded 104,000 times, and it is an $8.1 million bet that the EEM will be below $34.22 at December expiration.
This spread will realize its full value of $8.00 if EEM is below $27 at expiration, which would amount to a tidy $75 million profit for this trader.
The ETF is already down about 14 percent this year, but rising rates in the U.S. mean that there could be the potential for more downside ahead, despite seemingly attractive valuations.
Emerging markets have been plagued by a series of problems recently, from high inflation in India, to civil unrest in Brazil, to slowing growth in China. On top of this, higher rates in the U.S. are luring money that had left the U.S. back home.
The selloff has brought EEM's price-earnings ratio to 11 and yield to 1.97 percent, which looks attractive relative to the S&P 500's 15 P/E and 1.98 percent yield.
For the long-term investor, beginning to average into a long position in EEM here is not out of the question—but in the near term, there could be considerable volatility and potentially more downside.
(Read more: Indonesia is latest emerging market whipping boy)
This trade was most likely done by someone who is already long EEM, and wants to protect themselves in the case of further declines. EEM's low this year was $36.16, and this level could be tested again, especially if the Federal Reserve announces tapering next month.
This spread will offer protection to EEM longs if the stock cannot hold the $36 level on the second test, and falls through $35.