Behind the $1.4 million bet against emerging markets

Emerging markets & election risk

Emerging markets have had a rough go of it over the past week, and one big trader appears to be betting that it's about to get even worse for the popular iShares Emerging Markets ETF, the EEM.

In one of Tuesday's biggest ETF trades, 43,000 November 35.50-strike put contracts were bought for 32 cents for share. Since each contract controls 100 shares, this trade cost about $1.4 million. The trade will turn a profit if the ETF closes below $35.18 on Nov. 18, which would represent a 4.5 percent drop from Tuesday's closing price.

Options buyer have been active in the EEM, as expectations for the size of future moves for the product have risen considerably in the past week.

This may reflect speculation about the increasingly likelihood of a Donald Trump victory in the presidential election, an event that is expected to bring short-term volatility to markets as a whole. In addition, his aversion to global trade could mean that emerging economies would suffer under a Trump presidency. More specifically, Chinese equities represent 26 percent of the fund — and Trump has made no bones about U.S.-China trade, saying the global superpower is "ripping us off."

Indeed, this particular trade may well represent a hedge against the possibility of a Trump win. That would explain the large expected move, as well as the short time frame.

Still, Eddy Elfenbein of the Crossing Wall Street blog said those who are betting against emerging markets in anticipation of Trump's policies "are acting several chess moves out," since enacting new trade policies would require many steps.

"We can look past the election, and I think the EM story is very good right now," Elfenbein said Tuesday on CNBC's "Trading Nation."