We’re about five weeks out from the start of Carnival in Rio de Janeiro, but the Brazilian stock market ETF $EWZ looks like it wants to get a head start on the party. And its one of the few places in the Western hemisphere pricing in muted volatility. This sets up a nice opportunity.
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Compared to where it was in the fall of 2018, volatility is coming in pretty tame:
Couple this with a chart showing signs of a breakout:
…and we’ve got ourselves a recipe for a nice leveraged gain if we get this one right.
From an internal note to the All Star Charts team:
The weekly chart of Brazil $EWZ continues to stand out as prices attempt to add build on last week’s breakout above the downtrend line from its 2008 highs. If it clears this area, this could be a leader on an absolute and relative basis for a very long time. (emphasis mine)
From where I sit, a move challenging 5-year highs north of $54 is not out of the question. With options priced so “cheap,” lets keep it simple and give ourselves plenty of time for a run to develop.
Here’s the Play:
We’re going to buy September 45 calls at $3.70. This play is incredibly straightforward. We’re in it to win it. If our vision plays out higher, we’ll look to close half the position out when we have a double — in this case around $7.40 — and then we’ll hang on for a free ride with the rest. This removes all our original risk, a best practice that has served us well over the long term.
With 238 days until expiration, anything can happen, including a complete reversal of the ETF. Our risk is defined to the initial debit paid at entry, but it’ll be pretty safe to say our thesis is busted if $EWZ closes below $40. If that happens, we’ll close the trade down for whatever we can get and reassess the situation.