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Petroleo Brasileiro Petrobras SA (ADR) (PBR) Bulls Pay Up

Short-term Petroleo Brasileiro Petrobras SA (ADR) premium is relatively expensive at the moment

by 8/14/2014 2:35 PM
Stocks quoted in this article:

Shares of Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) are extending Wednesday's slide, which was sparked by news of the unexpected death of Brazilian presidential candidate Eduardo Campos. At last check, the stock was 0.9% lower at $15.32, but was maintaining a foothold atop its 80-day moving average. In the equity's options pits, speculators are rolling the dice on PBR to take a sharp bounce off this rising trendline -- currently located at $15.30 -- and rally to a new annual high over the next five weeks.

Taking a step back, calls are trading at a rate nearly three times the intraday average, and are outpacing puts by a more than 4-to-1 margin. Buy-to-open activity has been detected at the equity's September 18 call, where 33,964 contracts have traded for a volume-weighted average price (VWAP) of $0.31. As such, breakeven at the close on Friday, Sept. 19 -- when back-month options expire -- is $18.31 (strike plus VWAP), or territory not explored since May 2013. Gains are theoretically unlimited beyond this point, while risk is capped at the premium paid, should PBR finish south of the strike at expiration.

These call buyers were willing to pay a pretty penny for their bullish bets. Not only did PBR's 30-day at-the-money implied volatility hit a new 52-week peak earlier, but the stock's Schaeffer's Volatility Index (SVI) of 47% ranks in the 69th percentile of its annual range. Simply stated, short-term Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) options are pricing in high volatility expectations at the moment.


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