This once scorned segment of the Wall Street population is now beloved, and chief among the fawned-over funds is the iShares MSCI Brazil Index (ETF) (EWZ) — the go-to exchange-traded fund for Brazilian exposure. Not sure what the weather is like in the country these days, but things are hot, hot, hot for Brazil in stock land.
To wit: EWZ has rallied 65% over the past three months in what many hope to be a signal that the long, dark bear market is finally over.
Only time will be the judge of that, but its certainly a promising start. The price of EWZ is perched nicely above all major moving averages, but it’s going to take some time for the 200-day moving average to flatten out and turn higher.
In the short run, Brazil might be a little too hot to trot (it’s up 14% in the past four trading sessions for heaven’s sake!) Chasing at this point is ill-advised, as the risk-reward is skewed firmly against buyers.
However, getting aggressively bearish on such a strong underlying chart is tricky. Like taking a laxative and a sleeping pill, your timing must be spot on or things will get messy.
Fortunately, the options market provides the ability to sidestep the direction betting and wager on volatility instead. In a low volatility world, EWZ stands out like Scarlett Johansson at a neighborhood comic book convention.
It has the highest implied volatility of all actively traded funds. And that means its option premiums are ripe for the selling. The implied volatility percentile is 90%, while most indices are in the single digits.
Squeeze Profits From EWZ With This Trade
If you think EWZ will remain in a wide trading range over the coming month consider selling May strangles.
The short strangle consists of selling an out-of-the-money call option and an out-of-the-money put option in hopes that the stock meanders and both options expire worthless.
Sell the May $33.50 call and $23.50 put for a net credit of 73 cents or better. The trade is positioned to deliver the max reward of 73 cents if EWZ sits between $33.50 and $23.50 at expiration.
To break even, EWZ needs to be above $22.77 and below $34.23. The profit range is highlighted in the accompanying chart.
The risk in the trade is that EWZ rallies or declines too much in the coming month. To reduce your loss consider exiting the trade if EWZ breaks above $35 or below $22.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
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