Vote of Confidence on Emerging Markets

May.27.11 | About: iShares MSCI (EEM)

By David Russell

Emerging-market stocks are bouncing at long-term support, and some investors apparently think that they're on solid ground. Our tracking systems detected a surge of put selling in the iShares MSCI Emerging Markets Index exchange-traded fund (NYSEARCA:EEM), the most popular instrument for tracking the overall performance of countries such as Brazil, Russia, India, and China.

It normally trades about 163,000 contracts in a session, but yesterday almost triple that amount crossed our screens. Most of the activity resulted from investors writing protection, betting that EEM isn't at risk of a major decline.

The June 47 contracts were the most active, with a single large block pricing for $0.98. The June 42s, the August 45s, and the August 40s traded in similar size for $0.06, $1.45, and $0.43, respectively.

EEM rose 1.29 percent to $47.25. It double-topped at $50 earlier this month, its highest price in more than two years, before pulling back and now bouncing at its 200-day moving average. Some investors may expect that level to provide support, believing that the fund will at least hold its ground for the next few months.

If they're right, they'll get to keep the premiums. If they're wrong, they'll have to buy stock. The strategy is popular when investors think a security is attractive but don't want to risk capital getting long.

Most of yesterday's put sales on EEM occurred early in the session and made money as the fund pushed higher later in the day.