Brazil Has Problems, But What Kind?

Every couple of years I get interested in the iShares Msci Brazil ETF (EWZ), the country’s largest equity ETF.

 

As a country, Brazil always seems like the Next Big Thing, and EWZ is the 

 

This also illustrates what Frank and I talked about on Wednesday in Capitol Gains: October Surprise and the types of volatility spurred by geopolitical issues.

 

I’ll unpack that today

 

Imagine the sweet sounds of Astrud Gilberto as we Samba down south …

 

 

Here’s how to trade it.

 

Brazil Looks More Like A Vol Chart Than an Equity Chart 

 

When Frank talked about “big volatility” on Wednesday during the Capitol Gains event, he meant regime change and structural issues that could destabilize nations.

 

The USA faced those potential issues in 2020 leading up to the election and culminating on Jan. 6.

 

Brazil has them now because the opposition is trying to get rid of the populist leader Jair Bolsonaro.

 

Brazil has had similar issues with presidents in the past.

Lula was indicted for corruption after his term. If you want a reason not to have a state-owned company, Lula’s presidential term and Petroleo Brasileiro S.A. – Petrobras (Ticker: PBR) is a good case study.

 

As you can see from the chart below, EWZ wants to move higher, but always has something that causes a peak.

That something is politics and it causes EWZ to trade more like the VIX than the S&P 500.

Five-year chart of EWZ,

In this case I will use diagonal put spreads.  I think the case against Bolsonaro is politically motivated, but it does historically cause a lot of equity stress in Brazil.

That plays out in stock.

The idea is to …

      • Sell near-term puts near the money
      • Buy some long-term puts more out of the money
      • Keep rolling them trying to grab EWZ underlying at some point 
      • Ride back up when the politics subside. 

All told, It could be worth 10 points in EWZ.

I will cover this technique in the Pro Plat class Monday night and the small group session for Trading Legion Tuesday night.

If you would like to attend these classes and cannot normally, send me a note at andrew@optionpit.com.

Capitol Gains w/ Frank Gregory
Option Pit DC and Wall Street insider Frank Gregory and I run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K Street knowledge and my options expertise.

      • I closed some PBR 9-level puts for a 40% return and have most of the calls financed now. I expect PBR to bounce with the politics as described above.

 

Pro Trading Room:
The Pro Room is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me during the entire trading session. 

 

The Pro Room used the rally on Friday to take profits and buy some junk downside SPY puts:

 

 

Trading Legion:
The Trading Legion is an intermediate-level education and a long strangle trading vehicle. The goal is to teach students the best times to buy options.

 

      • I closed the SPDR S&P 500 ETF Trust (Ticker: SPY) “slider” calendar for a 16% profit on Friday.  The trade was market-neutral and theta-positive.

 

Volatility Edge & Volatility Trading Club:

Volatility Edge is run by Mark and uses the proprietary Option Pit VIX Light indicator to guide volatility trading. The Vol Trade Club is run by me (AG), and employs a long strangle strategy that seeks to use VIX future decay to pay for upside VIX, VXX and UVXY options.

The Option Pit VIX Light Is Red and we could see VVIX below 100 by Friday for the first time in over a year.

 

Remember, many vol strategies I use are market neutral. That means whether SPX or VIX go up or down, the positions still make money. This is a technique you can learn in the Volatility Trading Club and Volatility Edge!

 

To Your Trading Success,

AG

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