Bearish EWZ Bets Heat Up Ahead of Opening Ceremony

Option buyers are picking up iShares MSCI Brazil Index (ETF) (EWZ) put options at a faster-than-usual clip ahead of the official start of the Summer 2016 Olympics in Rio

Aug 5, 2016 at 2:54 PM
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With the Summer 2016 Olympics officially kicking off in Rio de Janeiro tonight, the iShares MSCI Brazil Index (ETF) (EWZ) has been attracting plenty of attention lately, especially in the options pits. The exchange-traded fund's (ETF) put options, especially, are hotter than they've been in nearly a year, as the EWZ flirts with annual highs.

Since hitting a decade-plus low of $17.30 in mid-January, EWZ has nearly doubled on the charts, last seen just off a fresh 12-month peak of $34.21. The fund is now sitting atop the $30-$33 region, which marks a 23.6% Fibonacci retracement of its late 2010-early 2016 plunge, and also contained EWZ's pullback after the financial crisis.


Meanwhile, over on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), EWZ puts have been bought to open over calls at a much faster-than-usual clip during the past two weeks. The fund's 10-day ISE/CBOE/PHLX put/call volume ratio of 2.55 is higher than 96% of all others from the past year. In fact, the EWZ's 21-day put/call volume ratio just hit its highest point since August 2015 -- during global stock-market meltdown and a credit-ratings downgrade from S&P.


As a result, EWZ sports a Schaeffer's put/call open interest ratio (SOIR) of 1.58, indicating that puts outnumber calls among options expiring within three months. This ratio is higher than 93% of all other readings from the past 12 months, pointing to a bigger-than-usual put bias among near-term options traders.

The August 32 put has seen the biggest influx of open interest during the past two weeks, with nearly 47,000 contracts added. According to Trade-Alert, a block of 37,000 puts was bought to open at this strike yesterday.The August 32 put is now hands-down home to peak put open interest in the front-month series, with more than 48,000 contracts in residence. In the near term, this abundance of puts could translate into options-related support for the Brazilian ETF.

In conclusion, it will be interesting to see how the Summer Olympics  -- and the subsequent price action of the iShares MSCI Brazil Index (ETF) (EWZ) -- play out, especially with expectations for Rio as a host city notably low. Not only are people concerned about the spread of the Zika virus, but the state of Brazilian politics is uncertain after Dilma Rousseff's impeachment, and visitors are worried about general sanitation and organized crime.

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