Brazil Nuts (EWZ)

by Dan June 13, 2017 11:52 am • Trade Ideas

Shocker, Brazil’s President is embroiled in a corruption scandal. You’ll recall that the revelation of recordings implicating the President in misdeeds caused the Brazilian stock market to implode 10% on May 18th from very near a 52 week high.  Looking at the EWZ, the MSCI Brazil equity etf, the volume was immense that day, and the gap puts the security below the uptrend that had been in place from its 2016 lows:


To make matters worse, technicians were starting to think that Brazilian stocks were out of the woods, putting together the pieces for a multi-year bottom, that looked a lot like a head and shoulders pattern, with $40 the neckline:


At this point, the chart is a mess, and all bets are off with crude oil (which their economy and markets are very closely correlated to) appears to be at the very least range bound in the mid $40s, possibly with a downward trajectory with crucial technical support down the low $40s:


With the stock’s sharp decline in May came a commensurate spike in volatility, which has since subsided with 30 day at the money implied volatility at mid-May levels, which might provide an opportunity for those looking to make long premium directional bets in the EWZ:


So What’s the Trade?

Defined Risk Bearish

EWZ (33.75) Buy the July 34/31/28 put fly for .65
  • Buy 1 July 34 put for 1.65
  • Sell 2 July 31 puts at .60 (1.20 total)
  • Buy 1 July 28 put for .20


Breakeven on July Expiration – This trade breaks even at 33.35, about .40 below where the stock is currently trading. The most that can be lost is .65 with all of that lost above 34 on July expiration. The trade targets 31 and sharp movement below that level risks profits but it’s not a loser on the downside until 28.65. Profitable range is 28.65 to 33.35.

Rationale – This trade targets a continuation of the move lower and provides a large possible profit range slightly below where the stock is trading with its max gain around 31, near a support level.