Volatility is busting through the roof down south. The iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ) suffered its largest down day ever last week and has since been hopping around like a jackrabbit. While the frenetic pace may have the conservative class downing the anxiety meds, EWZ option traders are grinning from ear to ear. Remember, elevated volatility means premium sellers are getting paid a hefty sum.
More on that in a minute. But first, let’s analyze Brazil’s recent price action. The May 18 mega-gap just about pushed EWZ into a bear market overnight. To drop almost 20% in one fell swoop is mind-boggling.
Since then, we’ve seen a nice little recovery which ended Wednesday with a test of the 200-day moving average. Not surprisingly, the test failed, and EWZ ended with a doji candle signaling a potential reversal.
Yesterday’s drop confirmed the reversal, and we now have a resistance level that we can trade against. While the Brazil ETF may not take another plunge into the abyss, it’s a safe bet its upside momentum should slow in the coming weeks.
On the option pricing front, EWZ carries an IV Rank of 68%. That means its implied volatility sits at the 68th percentile of the past year’s range.
Of all the major market ETFs I track, EWZ currently boasts the most expensive options. That should be music to a premium sellers’ ears. It means you can go much further out-of-the-money with short option positions.
Short EWZ Calls
With the fund encountering resistance, selling out-of-the-money call options makes sense here. Sell the Jun $37.50 calls for 46 cents. The initial margin requirement for the trade should be around $460, which means the potential reward of $46 (46 cents x 100) represents a 10% return. You will pocket the entire premium if EWZ is below $37.50 at expiration.
By selling the call, you do obligate yourself to sell 100 shares of stock at $37.50 if the option rests in-the-money at expiration. If you’d prefer to sidestep assignment, then close the trade when the stock pops above $37.50.
At the time of this writing, Tyler Craig held short option positions in EWZ.
