Sizeable Equity Collar Employed on iShares MSCI Emerging Markets ETF

EEM – iShares MSCI Emerging Markets Index ETF – One cautiously optimistic options player initiated a large-volume equity collar in the March 2011 contract on the emerging markets fund in the first half of the trading day. Shares of the EEM, an exchange-traded fund designed to correspond to the MSCI Emerging Markets Index – an index created to measure equity performance in the global emerging markets, slipped 1.15% lower to stand at $41.55 just after 12:45 pm ET. The investor appears to have enacted a 20,000-lot equity collar with a .59 delta, selling 20,000 calls at the March 2011 $45 strike for premium of $1.90 each in order to buy the same number of puts at the March 2011 $35 strike at a premium of $1.68 apiece. The sale of the calls to buy the puts results in a net credit of $0.22 per contract – or $440,000 – to the trader. The collar was tied to the purchase of 1,180,000 EEM shares at $41.58 each, as indicated by the .59 delta. It seems the investor is hoping to see shares appreciate and perhaps have the underlying position called from him at $45.00 if the calls land in-the-money at expiration next year. But, the long puts provide downside protection in case shares falter rather than fly higher. The parameters of the transaction suggest the trader will adjust the underlying position in accordance with shifts in delta as influenced by changes in the value of the equity. Options implied volatility on the EEM is higher by 9.7% to arrive at 26.61% as of 12:55 pm ET.

About Andrew Wilkinson 1023 Articles

Affiliation: Interactive Brokers

Andrew Wilkinson is the senior market analyst at Interactive Brokers Group, where he provides daily commentary and analysis on U.S. equity options trading throughout the trading day. Andrew provides webinars designed to explain option-related trading scenarios covering futures, fixed income, forex and equities.

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