The Options Market Has a Story to Tell

The MSCI Emerging Markets (EM) Index has fallen 11.7% year to date through March 11. For further insight into equity markets, we can turn to the options market, which has historically served as a window into investors’ views.

Currently, options linked to the MSCI EM Index have repriced downside risk (puts) relative to upside risk (calls), despite retracement in the underlying markets. This suggests option markets have priced in more risk to the downside, as opposed to recovery, at least in the short term.

How does the options market expect volatility to change over time? For that, we can look to the volatility term structure implied in options linked to MSCI EM Index. This measure inverted on the day of Russia’s invasion of Ukraine, highlighting higher short-term volatility risk. And, as shown below, volatility term structure has shifted up, implying an increase in expected volatility for emerging markets in both the short and long term.