Global Option Opportunities

The action in the emerging markets space has been fast and furious so far in 2011. While the major U.S. market indices all had strong showings in January, we saw a distinct selloff in the emerging markets. The sector at large, as measured by the iShares MSCI Emerging Markets Index (NYSE: EEM), fell 4% in January, with substantial selling taking place on Jan. 28. Much of the political upheaval in Egypt came to a head that day, and it caused traders in the sector to take a lot of their bets off the table.

For options trading enthusiasts, the current selling in the emerging market space presents a lot of opportunity. Whether you are bearish on the sector and think the recent selling is a harbinger of more pain ahead, or whether you’re bullish and view the latest pullback as a great buying opportunity, there are plenty of liquid sector exchange-traded fund (ETF) options to choose from.

Here are 10 option plays for whichever side of the emerging market fence you sit on.

iShares MSCI Emerging Market Index

The iShares MSCI Emerging Market Index (NYSE: EEM) is the most widely followed ETF tracking the emerging markets. It is a good choice for option traders who want broad exposure to the biggest emerging market companies from the biggest emerging market countries. Top five countries represented here are China, Brazil, South Korea, Taiwan and South Africa. So far this year, EEM is down 1.7%.

Bears: If you think the selling in the emerging markets at large will continue, then look at a slightly out-of-the-money option like the EEM Mar 46 Puts. This contract has substantial open interest, and it trades at a relatively low cost.

Bulls: If you consider the pullback here as merely a slight correction, then an out-of-the-money call such as the EEM Mar 47 Call is an inexpensive play with a lot of open interest.

iShares FTSE China 25 Index Fund

The iShares FTSE China 25 Index Fund (NYSE: FXI) is an ETF pegged to the biggest companies on the Shanghai Composite Index. Sometimes called China’s Dow, FXI lets investors participate in the China equity market without having to buy either ADRs or Hong Kong-traded stocks. So far in 2011, FXI is off just 0.32%, and that doesn’t give either the bears or the bulls much insight as to where China stocks are headed.

Bears: If you suspect that China’s growth miracle, and the value of her stock market, are way overdue for a pullback, then the slightly out-of-the-money FXI May 42 Puts might be an attractive option play.

Bulls: For those who want long exposure to stocks in what is still undeniably the biggest growth engine of the global economy, then look at the out-of-the-money FXI May 44 Calls.

PowerShares India

India is one country that’s really had a tough go of it this year. The PowerShares India (NYSE: PIN) has dropped 12.59% year to date. The selling in the country’s equity markets was sparked in large part to that nation’s recent 25-basis-point interest hike, the seventh such hike in the past 12 months. Inflation is a very real problem in India, and it’s putting a lot of pressure on stocks.

Bears: Traders who want to take advantage of more downside in India should look at the very inexpensive, out-of-the-money PIN Mar 19 Puts.

Bulls: Aggressive traders can play a potential rebound in PIN with inexpensive, out-of-the-money PIN Mar 26 Calls.

iShares S&P Latin America 40 Index

Latin America is a hotbed of emerging market activity, as the region has some of the biggest natural resource and raw materials producers in the world. Growth in natural resources consumption from China has helped fuel the iShares S&P Latin America 40 Index (NYSE: ILF). After a strong move higher in 2010, ILF has sold off this year, with the fund down 2.53% year to date.

Bears: If you think the Latin America party will continue winding down over the next several weeks, a good choice would be the ILF Mar 50 Puts, which currently are just slightly out of the money.

Bulls: Latin bulls can run with out-of-the-money ILF Mar 55 Calls.

iShares MSCI Brazil Index

By far, the biggest emerging market in Latin America is Brazil. Stocks from that country make up over half of the exposure in the aforementioned ILF, but that fund also includes stocks from Mexico, Chile and Peru. Options traders who want a pure play on Brazil can do so via the iShares MSCI Brazil Index (NYSE: EWZ). This fund contains some of the biggest raw materials companies in the worlds, and that’s what makes it such a dynamic way to play both global and emerging market growth. So far in 2011, EWZ has failed to attract buyers, as the fund has slid 4.26% year to date.

Bears: Traders who suspect there will be more downside in Rio should consider the heavily traded EWZ Mar 72 Puts.

Bulls: Those who think the Carnival celebration in March will bring buyers back to the sector might want to take a look at the EWZ Mar 79 Calls.

At the time of publication, Jim Woods held no positions in any of the stocks, funds or options mentioned in this article.