10 days ago we checked in on Brazil and the various factors affecting their stock market (read here: Brazil Nuts). Also, from a technical standnpoint we felt the EWZ, which had recently gapped lower and was trying to put in a bounce was probably more likely to fail on the bounce than hold. So when the EWZ was 33.75 we looked to a defined risk trade targeting a few dollars lower. Here it was:
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
EWZ has drifted a bit lower since then so it’s a good time to check in on the trade. With EWZ 32.95 this trade is worth about .90. So decent gains on the move lower but but not nearly the type of win yet we’re looking for. Obviously the target on the downside is 31, at which point the trade could be worth $3 on expiration, so it sill sets up well for that. But I also wanted to explain a couple moving parts of the trade to now look out for as we get towards July expiration.
When the trade was first detailed it was in the money by .25, but at a cost of .65, which means it has extrinsic premium. In simple terms what that means is the breakeven is lower than the entry, and the stock needs to go down to be profitable. At this point that situation has reversed. If the stock were to go nowhere, and close at this same exact point on July expiration, the current profits would be more. That’s a result of now being below that initial breakeven.
That also means for trade management purposes that the trade has 2 ways to win, and one way to lose (go lower, go nowhere it gains, go higher it loses), whereas at entry it has two ways to lose (go nowhere, go higher it loses, go lower it wins).
So basically now, we can watch the stock, if it starts to go higher towards the 34 strike it can be closed for small gains. If it goes sideways, or lower, we can be patient knowing the decay is in our favor. A good stop on the upside is the original breakeven point of 33.35. The point on the downside to take it off is the target price of 31. And patience anywhere between.