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Options Theory: How (not) to Trade the MSCI EAFE and Emerging Markets Indexes

September 13, 2018

By | 3 Comments

I’m an unabashed lover of Iron Condors. The Russell 2000 Index is my underlying of choice, but I’m certainly not opposed to unleashing the strategy on the S&P 500. What I’d really like is to have other Indexes that aren’t correlated to the Russell so that I can deploy multiple Cash Flow Condor systems without fear that they will all peck my eyes out simultaneously.

And that’s why I found this email from the CBOE in my inbox so intriguing:

The MSCI EAFE Index is designed to track Europe, Australasia, and the Far East. Institutions view this Index as the go-to benchmark for monitoring “Foreign Developed” stock markets. The MSCI Emerging Markets Index tracks stocks in the so-called BRIC countries (Brazil, Russia, India, and China) as well some smaller nations falling under the emerging markets banner.

I’ve always tracked both areas in my ETF watchlist using EFA and EEM. But neither one of those funds is high-priced enough to trade Iron Condors on. They trade at $67 and $42, respectively. And while EEM is definitely a monthly candidate for strategies like naked puts, naked calls, short strangles, and the like, the paltry premiums available in EFA leave much to be desired. Its implied volatility simply runs too low to elicit any excitement from an options seller like me.

But a big, fat, high-priced Index that tracks both areas? Now that could work. And surely they wouldn’t list weekly options on an Index that isn’t already liquid would they?

Would they?

The email prompted me to throw MXEA and MXEF on my index watchlist alongside the big boys like SPX. Then I scurried over to the Trade tab to view the options chain and this is what greeted me:

YUCK! C’mon, man! Donde esta liquidity? No open interest. Monster truck wide bid-ask spreads. I can’t trade these. I wouldn’t even trade them with your money. If no one is playing with the standard monthly contracts then why oh why list Weeklys, CBOE? Are you trying to further fragment the already minimal activity?

Maybe they’re hoping that Weeklys now being available will incite more participation. If I recall correctly, it’s usually the other way around. First the stock proves its popularity with standard monthly options. Then you list Weeklys. But whatever. I’ll be the first to root for any of these to gain traction.

Because I would LOVE to have enough liquidity in both MXEA and MXEF to start playing them. Sadly, I fear such a day is far, far off in the future. For now I must be content to let foreign developed markets lie dormant, and settle with playing emerging markets with naked option plays in EEM.

3 Replies to “Options Theory: How (not) to Trade the MSCI EAFE and Emerging Markets Indexes”

  1. JustinDriskell says:

    Where’s this spike in open interest they discussed in the email?

    1. Tyler Craig Tyler Craig says:

      Hey Justin,

      It looks like that was the maximum intra-month open interest since Jan 2017. So that covers about 20 months of time. There must have been a decently active month over that time frame that reached the contract amount they mention across all strikes. It doesn’t mean there’s that type of activity every single month.

      It’s also not as great as it seems because those thousands of contracts are split over a ton of strike prices.

  2. wrkrel says:

    Hello Tyler,

    I am going through your course Iron Condors for Cashflow which was probably recorded in 2016. I feel encouraged to see that you still maintain your interest in RUT as you mentioned in the course.


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