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Brazilian ETF faces downside play

Brazilian stocks are beginning to fight their way higher after struggling for eight months, and one big investor is hedging against further downside.

optionMONSTER's Depth Charge tracking system detected the purchase of 12,500 January 65 puts on the iShares MSCI Brazil Index ( EWZ ) exchange-traded fund for $5.80. Some 25,000 January 45 puts were sold seconds later for $1.31, resulting in a total cost of $3.18 for each contract owned.

EWZ Chart

The EWZ rose 0.64 percent to $69.47 on Friday. The fund significantly outperformed the S&P 500 (purple line on chart) after the market bottomed in March 2009 but then lagged starting in November while U.S. stocks continued to rally.

In the last month, however the ETF is up 6 percent versus the S&P 500's 2.7 percent gain, which could suggest that another period of strength is taking shape. It would fit broader patterns that have appeared our monitoring systems since the May 6 "flash crash."

The option trade on EWZ is designed to hedge against a major selloff and could have been implemented by a shareholder either seeking protection or making an outright bearish play. It will return a maximum profit of about 529 percent if the fund closes at $45 on expiration.

The trade is known as a "ratio spread" because the investor sold two times more puts than were bought. Because of the larger short position, gains will erode below $45 and turn to losses if the EWZ falls below $25--a level not seen in five years.

The Depth Charge showed overall options volume in the fund at almost twice the average level on Friday, with puts accounting for three-quarters of the activity.

(Chart courtesy of tradeMONSTER)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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