Brazil (EWZ) Is a Bottom Fishers Paradise


The iShares MSCI Brazil Index (EWZ) boasts a number of attractive qualities for the bottom fishers among us.

isharesAllow me to highlight a few of the more prominent ones along with a way to score some income should EWZ succeed in its reversal efforts.

For starters, the popular country ETF has been beaten silly. While U.S. markets are perched near all-time highs, EWZ has descended back near its 2008 lows. A fact, by the way, that I find quite fascinating considering how much panic it took to drive EWZ to the $30 level amid the fear-fest of ’08.

Brazil’s slow price bleed has lifted its dividend yield close to 4%, sending a clarion call to income hunters.

Of course, low prices are never a great stand-alone reason to buy shares of an ETF, or stock for that matter. No, what we need is some indication that the ETF is at least stabilizing.

And EWZ has that in spades.

As the chart below will attest, the Brazil ETF has traveled in a wide trading range this year that has taken on the form of a potential inverted head-and-shoulders pattern. The right shoulder is in the making as we speak. Should EWZ remain above the $32 support level (the low of the right shoulder) we could have a nice little bottoming pattern on our hands.

Source: OptionsAnalytix

The neutral price action in EWZ has also been sufficient to turn the 50-day moving average, which is now rising.

Short EWZ Puts for Income

The cheap price tag of the EWZ ETF makes if a perfect candidate for short puts. The margin requirement will be low giving the strategy a higher return on investment.

Sell the Jul $31 put for 50 cents or better. The short put offers the potential for $50 of income provided EWZ remains above $31 for the next month. If you have a margin account the cost for shorting, the put should be about 15% or so of the current cost of EWZ.

At around $500 that makes the potential return on investment roughly 10% — a respectable return for a high probability trade such as this.

By selling the put you obligate yourself to buy shares of EWZ at $31 if assigned. Those wishing to forego purchasing shares can simply exit the trade if EWZ falls beneath $31.

EWZ is on the ropes today, so consider waiting for an up day to signal it’s rebounded before pulling the trigger.

At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.

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