Emerging Market Play for Futures Traders
Here are the contract specifications for VXEM futures. One important difference is that the contract multiplier is $100, making these futures analogous in size to the Mini-VIX futures, as both products are 1/10 the size of the regular VIX contract. VXEM is also the most successful of the products CFE has launched in recent years. While volumes are still modest, it is not uncommon to see 300 contracts or more trade on a given day, and that tends to be greater than the daily volume of any other non-VIX product on the exchange.
VXEM is especially interesting for volatility traders at the moment. Because the rally in developed market equities has pushed option prices so low, traders are looking elsewhere for sources of edge. Consider the difference between the one-month realized volatility of the S&P 500, at 9.1%, and the volatility bid in December VIX futures, at 14.57. That difference is likely to be even smaller as, historically, there has tended to be a floor under implied volatility around 10-12%. Compare the trailing volatility of EEM, at 15.6%, and the comparatively robust volatility bid in December VXEM at 23.90. Instead of squeezing another two or three points out of near-term VIX futures, while hoping the market doesn't experience a trade-busting correction before the new year, traders can sell the richer VXEM contract and book a larger profit if emerging market stocks continue to find their footing.
Futures Trade: Sell VXEM December futures at $23.90.
If EEM stumbles, on the other hand, and short-term implied volatility spikes, I would look for the exit on a close above $26.50.
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