The budding commodity recovery is showering profits on Brazil. The iShares MSCI Brazil Index (ETF) (EWZ) is up a scorching 50% within the past two months, a barnburner by any measure. Year-to-date, EWZ is up 25% besting the S&P 500 by a wide margin.
Admittedly, EWZ is still 75% off its all-time highs, but let’s not rain on the bulls’ parade okay?
So what does Brazil have to thank for the instant gains? Look no further than the aforementioned commodity rally.
As one of the pillars of the emerging-markets space EWZ’s fate is tied in large part to the action in the commodity pits. Take a look-see at the accompanying chart overlay of the Brazil ETF with the veteran commodity index — the Thomson Reuters Core Commodity CRB Index.
They have been fast friends. The positive relationship between the two is obvious and is confirmed by the correlation study shown in the bottom panel of the chart. The current 20-day correlation is positive 0.95, suggesting EWZ and the broader commodity complex are moving in virtual lockstep.
Not surprisingly, the mass investor migration to Brazil has increased demand for EWZ options. At 76%, the implied volatility rank is nestled at the upper end of its one-year range, suggesting option premiums are ripe for the selling.
Sell EWZ Covered Calls for Income
Owners of EWZ shares should use this opportunity to sell covered calls against their holdings. The premium captured from the call will provide a bit of protection against any kind of giveback in the Brazil ETF over the coming month.
Sell the EWZ April $26.50 call for $1.30 or better. One contract should be sold for every 100 shares of stock you own. By selling the call, you obligate yourself to sell shares at $26.50. In exchange for bringing on the obligation, you get to keep the $1.30 premium. Though the upside is capped, you can still capture about $42 in the stock (currently at $26.08) plus the $130 premium totaling $172. That’s a 6.7% return over the next month. Not bad by covered call standards.
Traders who don’t already own EWZ but want to head south of the border for some exposure could buy shares here and sell the April $26.50 call as suggested. The premium received will reduce your cost basis, thereby increasing your probability of success in the days ahead.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
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