Petroleo Brasileiro Plunge Draws Rare Crop of Options Bulls

The broader trend in recent weeks has been toward put buying

May 24, 2018 at 2:20 PM
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Shares of Petroleo Brasileiro (NYSE:PBR) are sinking today -- falling in step with other energy stocks -- after the Brazilian oil giant issued a short-term price cut for diesel prices in order to ease tensions with protesting truckers, a move seen as a sign of government interference. What's more, Morgan Stanley downgraded the equity to "outperform" from "neutral," and cut its price target to $13 from $15. At last check, PBR stock was down 14.6% at $12.90, and options volume is soaring.

Most recently, 97,400 puts and 79,800 calls were on the tape -- five times what's typically seen at this point in the day, and volume pacing in the 99th annual percentile. However, it's the June 14 call that's most active, with more than 16,000 contracts traded. It looks like new positions are possibly being purchased here for a volume-weighted average price of $0.42, making breakeven for the call buyers at expiration $14.42 (strike plus premium paid).

Widening the scope shows put buyers have been more active than call buyers in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), PBR's top-heavy 10-day put/call volume ratio of 1.51 ranks in the elevated 94th annual percentile.

Whichever path options buyers are choosing, it's an expensive time to be purchasing premium on near-term contracts. PBR's 30-day at-the-money implied volatility of 56.7% ranks in the top percentile of its annual range, and is on track to close at a new 52-week peak. In other words, elevated volatility expectations are being priced into short-term options. Echoing this, the implied volatility term structure for June options is much higher than the further-dated September options -- 14.8% compared to 3.8%.

Looking at the charts, Petroleo Brasileiro shares had been flying high for most of the past year, more than doubling from their July low at $7.74 to their May 16 three-year peak at $17.20. The stock began selling off after hitting this milestone, and is pacing for its sixth straight loss -- its longest daily losing streak since early 2017 -- and its biggest weekly drop since October 2008. Plus, PBR has breached the formerly supportive $13.50 mark, home to a 38.2% Fibonacci retracement of its recent rally, and is on track to close south of its 120-day moving average for the first time since December.

pbr stock price chart may 24


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