Brazil’s ripping this week, and today’s biggest options trade is following the trend.
Check out the bullish call spread this morning in oil giant Petrobras (PBR), the country’s largest company by market cap:
- A block of 130,000 October 16 calls was bought for $0.28.
- Another block of 130,000 October 17 calls was sold for $0.13.
Remember owning calls fixes the price where a stock can be purchased, while selling them generates income and creates an obligation to deliver stock if a certain level is reached. Combining them lets the investor capture a move between two prices for a fraction of the cost. (See our Knowledge Center.)
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If they’re right about direction, the leverage can be epic. In this case, they paid a net $0.15 and will collect $1 if PBR closes at or above $17 on expiration. That would be potential profit of 567 percent from the shares advancing less than 25 percent. However, the position will expire worthless if the stock remains under $16.
The strategy looks like a high-risk bet that pro-business candidate Jair Bolsonaro will get a majority of the votes in Sunday’s presidential election. That would prevent a runoff and mark a turn away from almost two decades of socialist rule.
As reported on Market Insights, Brazilian stocks have surged recently on optimism about the election, although few experts see Bolsonaro winning in the first round. (These calls expire before the October 28 runoff date, which suggests the trader sees the potential for a surprise.)
PBR rose 0.51 percent to $13.76 in afternoon trading and is up 30 percent in the last month. The stock peaked around $17 in May, so today’s call spread is looking for a move to that potential resistance level.
Overall options volume in PBR is more than twice the average amount over the last month, with calls outnumbering puts by a bullish 28-to-1 ratio.