Brazil option combination in play

Our market scanners picked-up some interesting action in iShares MSCI Brazil ETF earlier utilizing both stock and options. The trade involved a 10,000 put spread in the November series, where the investor bought an identical amount of 45.0 strike puts and sold the 40.0 strike.

Buying the upper strike alone would have been relatively expensive at a 2.08 premium, yet the sale of the lower strike put defrayed the cost by 86-cents. In addition the investor appears to have bought stock, which today is trading at around $49.43 per share. The investor now requires the stock to punch a hole in the 52-week-high at $51.75 set back in October and then gear up for fresh highs before the trade would breakeven at $56.35 or 14% above the latest price.

Chart – Interesting profile for EWZ stock and option combination

The worst outcome through November’s expiration is a decline of 9% to the upper strike at 45.0, which according to the profile of the combination would deliver the maximum loss. However, the trader would make maximum gains at the lower 40.0 strike below which, profits would begin to unwind.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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