Trade update: Closing the Brazilian (iShares MSCI Brazil Capped ETF) trade… or not.
This is just a short trade update on a Trade Alert we put out on May 19th.
In the alert, we discussed how to trade the big smack down in the Brazilian equity market when it was announced that the Brazilian president was going to be tried for corruption.
The Brazilian stock market fell some 10%, and trade was halted for 30 mins. On top of that, the real collapsed some 7%, so at one stage the Brazilian stock market was down some 18% literally overnight.
If you recall, the trade was a bull call spread, buying the January 2019 US$33 strike call and selling the US$40 strike call against it for a spread of US$2.4.
The max payoff was 190% at expiry of the spread (January 2019) if EWZ was to close above US$40.
We have had a number of subscribers ask us what to do with this trade now and it’s being discussed in the Slack community (if you’ve not yet joined, you’re always welcomed).
Currently the spread is trading at US$4.52. So if you were to close the trade now then your return would be around 88% (4.52 – 2.40/2.40) – depending, of course, on where you bought the spread, since the market began gapping higher almost immediately.
You may ask, but why only 90%? It is above 40, so isn’t the upside capped once the stock trades above the strike of the sold call (in this case US$40)?
We’ll only get the max pay-off when there is NO time value left in the sold option, which will be at expiry when there is physically no time left. At that point, the only value left in the sold option would be its intrinsic value (remember, when the option was sold the value of that sold option was all time value).
So what to do with the trade? We think hang on as there is still a lot of upside so long as iShares MSCI Brazil Capped ETF can stay above US$40 come January 2019. We don’t think this will be hard given how emerging markets and commodities are making a big comeback.
Depending on your risk appetite and how many contracts you purchased, you can always take some money of the table by selling down some of the position. This is entirely up to you and dependant on your own risk appetite and overall portfolio construction.
Now, for the hard luck story. We didn’t do this trade. In a personal account I got a tiny position filled immediately as I was recording the video for you but then in the fund… Well, we put the order on for a limit order of US$2.4 but we were never filled (this is why it never featured in the Insider Portfolio).
Would you believe it the spread traded as low as US$2.50 (on June 23rd)? What a bugger! In hindsight, we should have raised our buy price but you know what they say about hindsight.
The good news is that many of you did this trade and managed fills at or around the suggested buy price. Good for you. Bad luck for us (so far).
Anyway, this was just a quick update on the trade as we had been asked by quite a few subscribers about what course of action to take.
The trade isn’t over yet, but it has worked and our thesis of buying the panic has worked.
Founder & Editor In Chief, Capitalist Exploits Independent Investment Research
Founder & Managing Partner, Asymmetric Opportunities Fund
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