The Options Market Is Saying Something About Brazil That Nobody's Talking About

EWZ

The speaker suggests that Brazil's economy, which is heavily reliant on oil and soybean exports, could benefit from stable or rising oil and soybean prices. Given the current volatility in oil prices and the potential for Brazil's exports to improve, a bullish trade in EWZ options, particularly around the April expiration, could be a viable strategy. The speaker highlights the liquidity and tight bid-ask spreads in EWZ options, which make it easier to execute trades with lower slippage.

EWZ

The market is showing a slight bias towards the downside, as indicated by the higher ask price for 34 puts compared to calls at 39. Selling the 34 puts could be a viable strategy for a bearish trade, given the 72% probability of expiring worthless and the potential for a $33 profit if the underlying remains above 34. The trade requires a capital requirement of $482 and generates $2.06 per day in theta. This strategy is suitable for traders looking to speculate on a product related to but not directly tied to the Straits of Hormuz, such as EWZ.

Uncertainty in Oil Prices and Its Impact on Volatility

The uncertainty surrounding the Strait of Hormuz and potential disruptions in oil transportation has led to increased implied volatility in USO options, particularly for near-term expirations. This indicates that traders are pricing in a higher likelihood of short-term price swings due to geopolitical risks. The volatility is lower for longer-term expirations, suggesting that the market perceives less uncertainty over extended periods. This volatility pattern can be used by traders to identify opportunities in options strategies that capitalize on short-term price movements.

Options Skew and Market Bias

The options market shows a slight bias towards the downside, as evidenced by the higher ask price for 34 puts compared to calls at 39. This skew suggests that the market is pricing in a higher probability of downside movement. The skew is a useful indicator for traders to gauge market sentiment and potential directional bias.

What is the current state of oil prices and how is it affecting the market?

Crude oil prices are currently down slightly, but there is significant uncertainty due to geopolitical tensions in the Strait of Hormuz. This uncertainty is reflected in the high implied volatility of USO options, particularly for near-term expirations.

TakeawayTraders should be aware of the potential for short-term price swings due to geopolitical risks, which are reflected in the volatility of oil-related assets.

What is the probability of the 34 put expiring worthless?

The 34 put has a 72% probability of expiring worthless.

TakeawayTraders can consider selling the 34 put as a bearish trade due to its high probability of expiring worthless.