Petrobras has been one of the most active names in the options market in the past two weeks, consistently showing up in our notable activity post in that period. In this morning’s post, I noted another large options trade in PBR from yesterday:
PBR – After touching its highest level in nearly 2 years last week, PBR has declined 10% since Sept 2nd, including 5.3% yesterday. The Nov 16/19 risk reversal traded 40k on the session, looks like the trader selling the Nov 16 put to buy the Nov 19 call. 40k of the Nov 16 puts traded at an average price of $0.74, and 40k of the Nov 19 calls traded for an average price of $1.50.
Most of PBR’s recent activity was call buying and call rolling, as PBR had an explosive move from its March low to its high above $20 last week, doubling in that short period. That’s even more surprising considering the weakness of crude oil since the June highs. PBR went from a $65 billion market cap company to a $130 billion market cap company in less than 6 months:
The 2 year chart shows that PBR reached its highest level since Nov. 2012 on the recent move, though it has been aggressively sold in the past week, and is now testing its 1 year breakout level of $18. This is a crucial spot for the stock, as a break below here would be a sign that the recent move higher was the last leg of buying exhaustion rather than the start of a sustainable trend change for Petrobras.
The breakout and then sharp decline in PBR mirrors the Brazilian market as a whole. EWZ moved to a new 52 week high in late August, but has failed to hold that move in the past week:
These failed breakouts are occurring as Brazilian investors prepare for the upcoming Presidential elections. Cantor Fitzgerald had a good note about potential for disappointment following the elections:
For Brazil, “order and progress” is an ideal always just one candidate or one election away. Our thought is that the Brazilian ‘election trade’ will eventually be sniffed out as the farce it clearly is. It does not take much of a sense of history to appreciate the irony that that Ms. Silva is running a reform campaign against a leftist Workers Party candidate, who herself came in under a reform agenda President (Lula). Moreover, Ms. Silva was herself a Workers Party minister from 2003 to 2008 under Lula. The more things change, the more things stay the same.
The recent failed breakout and the approaching elections has led traders to pay up for near-dated options. 30 day implied volatility is near a 1 year high:
Options traders are certainly nervous about the potential for an election disappointment, even if Dilma Rousseff is ousted. The charts also look negative after the recent failures, so we’ll keep an eye on Brazilian names as a possible tell for a turn in recent emerging market strength.