Economic growth in 2012 will be minimal in the United States, non-existent in Europe and slowing in China, from the looks of current data. However, one place we see a big potential for growth is Brazil, whose underlying fundamentals are among the world’s strongest.
Brazil’s rapidly emerging middle class is the engine driving growth in the country. The labor market has been exceptionally strong in Brazil, with the unemployment rate at 5.8% and falling.
Another catalyst for growth is the rapidly approaching 2014 World Cup and 2016 Olympics. These events have prompted major government investments in infrastructure. Increased investment in airports, the power grid, railways, roads, hotels and telecommunications will all have a long-term impact on Brazilian growth – all of which should transcend their current direct impact.
Besides investment in infrastructure, the Brazilian government is spurring growth by creating a stable, increasingly transparent political climate. Recently the government relaxed anti-trust regulations in order to make Brazilian companies more competitive in global markets. The government has also shown a dedication to controlling the nation’s inflation, which has been decreasing for the past several months.
Additionally, the government has been slowly reducing interest rates in order to increase local companies’ access to capital. Further interest rate reductions should be bullish for the nation’s Bovespa stock index.
To capitalize on this growth, here at Stutland Volatility Group we recommend selling the March 50 Put on the MSCI Brazil Index Fund (NYSE:EWZ). This ETF provides exposure to Brazilian equities without any exchange-rate risk. The March 50 Put is trading with a 41% implied volatility, meaning there is a significant premium to be collected by selling the option. By being short the put, we are collecting cash upfront and waiting for this ETF to dip before buying.
If EWZ closes below $50, which is near the 52-week low of $49.25, we get to buy the ETF at an exceptional value. If EWZ is not trading below $50 at March expiration, the premium collected is yours to keep and is a way to get paid to wait for the perfect entry into this fund.
Here’s a quick summary of this trade
Stock Price: $57.25
Option Play: Short Put
Sell: March 50 Put @ $1.50
Net Cost: $1.50 Credit
Breakeven: $48.50 = 50 – 1.50 (Short Strike – Net Credit)
Max Profit: $1.50 (Net Credit)
Max Loss: $48.50 = 50 – 1.50 (Short Strike – Net Credit)