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Options on MSCI EAFE (MXEA)
and EM (MXEF) Indexes
Tools to Manage Global Equity Exposure
U.S. Options
Options on MXEA and MXEF Indexes
Options on the MSCI® EAFE® (MXEA) and MSCI Emerging Markets (MXEF) indexes offer investors the potential opportunity to manage
global equity exposure, mitigate portfolio risk, and generate additional options premium income.
Key features of the index options include:
Large Contract Size Approximate Notional Size of One Options Contract on Feb. 11, 2020
MXEA and MXEF options have large notional size - approximately 25
> $100 multiplier for all 4 options contracts
to 30 times the size of the EFA and EEM ETF options. Investors may
experience commission cost savings based upon the number of
contracts needed to attain the same notional exposure.
Cash Settlement, European-Style Exercise
With European-style exercise, there is no risk of early assignment.
>
Cash settlement has no unwanted delivery or assignment of shares.
Last Day of Trading
Trading in expiring MXEA and MXEF options ends at 4:15 p.m. (Eastern
>
time) on the business day (usually a Thursday) preceding their
Expiration Dates.
Friday PM-Settlement and Weekly Options Source: Cboe Exchange, Inc. www.cboe.com/MSCI
The exercise-settlement value is the official closing value of the stock
>
index as reported by MSCI the day after the last trading day of the
expiring contract. MXEA and MXEF weekly options have expirations on
multiple upcoming near-term Fridays. Note that the MXEA and MXEF Approximate Notional Size of MXEA and MXEF Options
have stocks traded in different time zones and prices converted to US Avg. Daily Volume in 2019
dollars, and there is a timing difference between the end of trading
(usually at the Thursday close) and the settlement value (usually at
the Friday close).
Price and Quote Transparency for SEC-Regulated Securities
Hybrid trading on competitive open outcry and electronic markets.
>
Margin for Covered Calls with ETF Underlying
Offset ETF exposure on a “covered” basis in a margin account (Cboe
>
Regulatory Circular RG15-183)
Tax Treatment
Under section 1256 of the U.S. Tax Code, profit and loss on certain
> Source: Cboe Exchange, Inc. www.cboe.com/MSCI
transactions in Cboe’s options on MSCI indexes may be entitled to be
taxed at a rate equal to 60% long-term and 40% short-term capital
gain or loss, provided that the investor involved and the strategy Volatility Skew for Cboe’s Options on MSCI Indexes
employed satisfy the criteria of the Tax Code.* at the close on 13 Aug. 2019
Volume and Open Interest Implied volatility estimates in this chart ranged from
In 2019 the average daily volume was 558 for MXEA options and 926 10.7 for OTM MXEA calls to 35.9 for OTM MXEF puts
>
for MXEF options, and maximum open interest was 21,325 for MXEA
options and 47,048 for MXEF options.
Volatility Skew and Volatility Risk Premium
For the MXEA and MXEF options - (1) the implied volatility for OTM
>
puts generally has been higher than for the ATM options or the OTM
calls, and (2) the implied volatility generally has been higher than
the realized volatility. See pages 3 and 4 for a discussion of strategies
related to these concepts.
*Investors should consult with their tax advisors to determine how the
profit and loss on any particular option strategy will be taxed. Tax laws
and regulations change from time to time and may be subject to varying Source: Estimates by Bloomberg. www.cboe.com/MSCI
interpretations.
Cboe.com/MSCI © 2020 Cboe Exchange, Inc. All Rights Reserved. USO_v1.1
Options on MSCI EAFE (MXEA)
and EM (MXEF) Indexes
Tools to Manage Global Equity Exposure
Page 2 U.S. Options
MXEA and MXEF Stock Indexes
The MSCI EAFE® Index (ticker MXEA) is recognized as a pre-eminent benchmark in the United States to measure international equity
performance. It comprises the MSCI country indexes that represent developed markets in Europe, Australasia and the Far East.
The MSCI Emerging Markets Index (ticker MXEF) captures large- and mid-cap representation across 26 Emerging Markets (EM)
countries.
The MXEA and MXEF indexes experienced drawdowns and higher volatility during both February and December of 2018. During periods
of higher volatility, MXEA and MXEF options have the potential to hedge downside risk and generate more options premium income.
Global Stock Indexes and Implied Volatility
(Jan. 4, 2016 - Aug. 14, 2019). Daily closing values.
Sources: Bloomberg and Cboe Exchange, Inc. www.cboe.com/MSCI
In 2017, MSCI announced the first partial inclusion of China A shares in the MXEF Index.
Country Weights in MSCI EAFE® Index Country Weights in MSCI Emerging Markets Index (MXEF)
On 31 July 2019 the MSCI EAFE Index (MXEA) had a total market capitalization On 31 July 2019 the MXEF Index had a total capitalization of $5.43 trillion,
of $13.8 trillion, with 923 constituent stocks. Source: MSCI with 1,193 constituent stocks from 26 countries. Source: MSCI
Cboe.com/MSCI © 2020 Cboe Exchange, Inc. All Rights Reserved. USO_v1.1
Options on MSCI EAFE (MXEA)
and EM (MXEF) Indexes
Tools to Manage Global Equity Exposure
Page 3 U.S. Options
Strategies and Benchmark Indexes
Strategies Cboe’s options on MSCI indexes are designed to provide investors ways to efficiently gain exposure to the global equity
markets and execute risk management, hedging, asset allocation and income generation strategies. www.cboe.com/strategies
Some of the many index options strategies include:
“Low-cost” Combination Income Generation
Hedge Downside Hedging Iron Condors and Buy-Writes and
Protective Puts Collars and Iron Butterflies Cash-Secured Put-Writes
Put-Spread Collars
Implied Volatility Risk Premium (IVRP) The implied volatility generally has exceeded the subsequent realized volatility for MXEA
and MXEF index options.
30-Day Volatility for MSCI EAFE (MXEA) Index 30-Day Volatility for MSCI EM (MXEF) Index
The averages were higher for implied volatilities than for realized volatility The averages were higher for implied volatilities than for realized volatility
(Jan. 3, 2017 - July 2, 2019). Daily closing values. (Jan. 3, 2017 - July 2, 2019). Daily closing values.
Sources: Bloomberg estimates and Cboe Exchange, Inc. www.cboe.com/MSCI Sources: Bloomberg estimates and Cboe Exchange, Inc. www.cboe.com/MSCI
The IVRP has facilitated strong risk-adjusted returns by certain options-selling benchmark indexes (see below).
Benchmark Indexes In 2019, Cboe began dissemination of 12 new options-based strategy benchmark indexes that track the
performance of hypothetical strategies that sell covered MXEA or MXEF options every month:
Cboe MSCI Emerging Markets BuyWrite Index (BXEF) Cboe MSCI EAFE BuyWrite Index (BXEA)
> >
Cboe MSCI Emerging Markets 2% OTM BuyWrite Index (BYEF) Cboe MSCI EAFE 2% OTM BuyWrite Index (BYEA)
> >
Cboe MSCI Emerging Markets 20-Delta BuyWrite Index (BDEF) Cboe MSCI EAFE 20-Delta BuyWrite Index (BDEA)
> >
Cboe MSCI Emerging Markets PutWrite Index (PXEF) Cboe MSCI EAFE PutWrite Index (PXEA)
> >
Cboe MSCI Emerging Markets 2% OTM PutWrite Index (PYEF) Cboe MSCI EAFE 2% OTM PutWrite Index (PYEA)
> >
Cboe MSCI Emerging Markets 20-Delta PutWrite Index (PDEF) Cboe MSCI EAFE 20-Delta PutWrite Index (PDEA)
> >
Benchmark Indexes Since March 2006
BXEF and PXEF had higher returns and lower volatility than the two MSCI stock indexes
(March 31, 2006 - July 31, 2019)
Sources: Bloomberg and Cboe Exchange, Inc. Past performance is not predictive of future results. Please read important disclosures at www.cboe.com/benchmarks
Cboe.com/MSCI © 2020 Cboe Exchange, Inc. All Rights Reserved. USO_v1.1
Options on MSCI EAFE (MXEA)
and EM (MXEF) Indexes
Tools to Manage Global Equity Exposure
Page 4 U.S. Options
Higher Returns and Lower Volatility
Annualized Returns Standard Deviations
(March 31, 2006 - July 31, 2019) (March 31, 2006 - July 31, 2019)
BXEF and PXEF had higher returns than the other 4 indexes in this chart The 4 option-writing indexes had lower volatility than the 2 stock indexes
Less Severe Drawdowns and Higher Risk-Adjusted Returns The options-based BXEF and PXEF indexes had less severe
maximum drawdowns and higher risk-adjusted returns (as measured by the Sharpe and Sortino indexes) than the MSCI EAFE and EM
indexes.
Other Metrics for Six Benchmark Indexes
(March 31, 2006 - July 31, 2019) Maximum Drawdown Beta vs. S&P 500 Sharpe Ratio Sortino Ratio Skewness
(MAR = 0%)
BXEF - Cboe MSCI Emerging Markets BuyWrite Index -40.3% 0.80 0.36 0.59 -1.23
PXEF -Cboe MSCI Emerging Markets PutWrite Index -37.0% 0.67 0.35 0.57 -1.69
BXEA - Cboe MSCI EAFE BuyWrite Index -43.6% 0.73 0.13 0.26 -1.15
PXEA - Cboe MSCI EAFE PutWrite Index -38.4% 0.62 0.12 0.29 -1.55
MSCI Emerging Markets Index (US$) -61.6% 1.16 0.16 0.31 -0.5
MSCI EAFE Index (US$) -56.7% 1.04 0.12 0.26 -0.69
Sources: Zephyr StyleAdvisor and Cboe Exchange Inc.
Monthly Options Income
Monthly Gross Premiums for Cboe MSCI PutWrite Indexes
Gross amount* received as a % of the underlying
The average monthly gross premium received was 2.5% for PXEF and 1.8% for PXEA
(April 2008 - May 2019).
Source: Cboe Options Exchange.
*Please note that these are gross amounts, and the net returns usually were less (and could be negative) with an option-writing strategy. www.cboe.com/benchmarks
Please visit Cboe.com/MSCI for more details.
Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies are
available from your broker or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. The information in this document is provided solely for general
education and information purposes. No statement within this document should be construed as a recommendation to buy or sell a security or to provide investment advice. Supporting
documentation for any claims, comparisons, statistics or other technical data in this document is available from Cboe upon request. Visit www.cboe.com/MSCI for more information. Cboe®
and LEAPS® are registered trademarks of Cboe Exchange, Inc. MSCI and the MSCI index names are service marks of MSCI Inc. (“MSCI”) or its affiliates and have been licensed for use by Cboe.
Options contracts on any MSCI index (“Index Contracts”) are not sponsored, guaranteed or endorsed by MSCI, its affiliates or any other party involved in, or related to, making or compiling such
MSCI index. Neither MSCI, its affiliates nor any other party involved in, or related to, making or compiling any MSCI index makes any representations regarding the advisability of investing in such
Index Contracts. Neither MSCI, its affiliates nor any other party involved in, or related to, making or compiling any MSCI index makes any warranty, express or implied, or bears any liability as to
the results to be obtained by any person or any entity from the use of any such MSCI index or any data included therein. No purchaser, seller or holder of any Index Contract, or any other person
or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s
permission is required. All other trademarks and service marks are the property of their respective owners. © 2020 Cboe Exchange, Inc. All Rights Reserved.
Cboe.com/MSCI © 2020 Cboe Exchange, Inc. All Rights Reserved. USO_v1.1
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