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Top Trades for Fri, 19 May 2017 10:24 – EWZ

Speaking of corrupt Governments on the run – Brazil's President Temer is under investigation in connection with a corruption scandal – something we discussed back in March when I was interviewed for China Global Television:

As I said at the time "it's not going away" and here it is and nothing has changed my mind about taking the opportunity to go long.  This is the dip we were waiting for as Brazil's ETF (EWZ) took an insane dive, back to the December lows.  That's a bit of an overreaction because President Trump has proven you can have an inept, corrupt leader with a terrible policy agenda based on hate-mongering and cronyism, who is just two steps ahead of going to jail – and the markets can still rally, right?  

So I like EWZ down here ($32.75) and we can take advantage of this dip with the following trade for the OOP:

  • Sell 5 EWZ 2019 $25 puts for $2.00 ($1,000) 
  • Buy 10 EWZ 2019 $25 calls for $11.50 ($11,500) 
  • Sell 10 EWZ 2019 $35 calls for $5.50 ($5,500) 

In the LTP, we'll go bigger:

  • Sell 15 EWZ 2019 $25 puts for $2.00 ($3,000) 
  • Buy 40 EWZ 2019 $25 calls for $11.50 ($46,000) 
  • Sell 40 EWZ 2019 $35 calls for $5.50 ($22,000) 

In the OOP, that's net $500 on the $10,000 spread that's over $7,000 in the money to start.  The upside potential is $500 which would be a 100% return on your money and your worst-case downside would be owning 500 shares of EWZ for net $26/share ($13,000).   The ordinary margin on the short puts is just $780 so it's a very margin-efficient play as well.

Have a great weekend,

- Phil


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