Investors Turn to Global Index Options Overlay Strategies Amid Heightened Geopolitical Volatility

Kelly Broadhurst
May 25, 2022

When markets become volatile, investing in derivatives may potentially help market participants ride out the turbulence. Cboe MSCI Index options can be used to gain exposure to global markets, help generate income and provide portfolio protection.

Cboe® offers cash-settled index options trading on the MSCI Emerging Markets Index (MXEF) and the MSCI EAFE® Index (MXEA) benchmarks. These products provide opportunities for investment exposures across countries and currencies, which has become particularly attractive as global events spur volatility. 

Market Share Gains Alongside Global Volatility

Before the war in Ukraine introduced greater uncertainty in global markets, Cboe-MSCI Index options trading volume had been rising sharply throughout 2021. MXEA volumes were up 140% from the previous year and MXEF volumes were up 40%. During 2021, put-writing strategies had the greatest increase in popularity, with put volumes up 120% from a year earlier. 

Volume trends continued in the first quarter of 2022 when MXEA options experienced two record-breaking volume trading days with approximately $1.8 billion notional traded each day.  

Cboe-MSCI Index options tend to consistently gain market share on “Execution Fridays,” making up more than 70% of share for MXEA options vs. options on the iShares MSCI EAFE ETF (EFA), and more than 50% for MXEF options vs. options on the iShares MSCI Emerging Markets ETF (EEM). As more weekly and shorter dated options trade, it can potentially be more profitable to sell put options on Fridays rather than Mondays. This can be a way of providing insurance to the market as traders seek to protect against news and other events that may occur during weekend off hours, as these could impact the Monday open. Also, since monthly and serial expiry options always expire on Fridays, there tends to be more hedging flows.

Based on Cboe data, the put-call ratio for MSCI Index options is roughly 3 to 5 times higher than other index options, demonstrating the prevalence of put-writing and protective strategies for global indices.

Advantages of Cash Settlement, Contract Size and Tax Treatment

The rising popularity of MXEF and MXEA index options in 2021 coincided with a 35% decline in EFA options volume and a 19% decline in EEM ETF options volume. Investors may be looking to take advantage of Cboe’s European cash-settled options, which eliminates the threat of early exercise and position uncertainty. These options are settled in cash (not shares), so there’s no need to square up positions after expiration. Plus, they can only be exercised at expiration. Finally, the larger notional sizes of Cboe-MSCI Index options contracts mean investors can trade fewer contracts without worrying about early assignment or unwanted delivery. 

Investors using Cboe-MSCI MXEA and MXEF options in some circumstances may also receive beneficial tax treatment, with profit and loss on certain transactions taxed at a rate of 60% long-term capital gains and 40% short-term capital gains. Those with regulated portfolios operating under 1940 ACT and UCITS mandates may also prefer to use European-style cash index options over comparable ETF options.

Volatility Risk Premium with MSCI Index Options

As global volatility rocked the market in early 2022, one-month at-the-money (ATM) implied volatility for options linked to the MSCI EAFE and MSCI Emerging Markets (EM) indices reached 25% and 32%, respectively, and one-month realized volatility was 17% and 19%, respectively, as of March 31. That’s a considerable disparity between implied and realized volatility, particularly for emerging markets at about 13%. This volatility risk premium can be an advantage for strategies that systematically sell options—they could have the potential to generate relatively strong risk-adjusted returns.

During this same timeframe, skews steepened for options linked to MSCI Indices, where put options had higher premiums because investors wanted downside protection. 

Use Cases for Cboe-MSCI Index Options

●      Systematic Trading. There’s been a rise in systematic, short-dated options selling strategies. Volumes for options expiring in under one month were up 150% in 2021 and account for almost 60% of overall volume. Options expiring in less than three months make up roughly 80% of volume. The popularity of short-dated options trading mimics trends in the wider options industry over the last decade.

●      Short-term strategies. Put writing strategies are increasing in popularity, with put volume up 120% last year. This could reflect investors using these products as part of a strategy to monetize volatility without selling the right-tail upside for portfolio returns.

●      Order size. There’s been a move toward smaller clip sizes of 500 lots or less, with these trades up 140% last year. This increase in smaller lot sizes could be a sign of institutional investors breaking up trades across trading days, allowing risk to be spread across multiple strikes and avoiding concentration risk.

●      Order flow. Complex Order Book, including open outcry, remains the most popular channel for institutional strategy execution, comprising more than 75% of Cboe-MSCI index options volume in 2021.  


Learn more about how MSCI Index options may potentially help you manage global equity exposure, mitigate portfolio risk, and generate additional options premium income.

There are important risks associated with transacting in any of the Cboe Company products discussed here. Before engaging in any transactions in those products, it is important for market participants to carefully review the disclosures and disclaimers contained at