Brazil Bull Looks for Carnival Rally: Options Recap


Someone’s looking for a Carnival rally in Brazil’s top bank, with the help of an unusual options strategy.

Shortly after lunch on Friday, a trader sold 10,180 June 17 puts in Itau Unibanco (ITUB) for $3.58. At the same second, he or she bought exactly the same number of January 17 puts for $3.13.

Volume was below open interest in the January contracts, but not the Junes. That suggests a short-put trade was closed and rolled forward in time. They’ll even go past Carnival in March!

Both contracts are in the money because ITUB trades at $14.04. There are a few ways to explain the transaction.

First, remember that puts have negative delta. But shorting them gives you positive delta — similar to owning shares outright.

Second, it’s not clear when they might have originally sold the January 17s because ITUB hasn’t been over that level since early in the decade. Who knows, maybe they held and nursed this money-losing trade for years hoping for a rally back above $17. (See our Knowledge Center for more about the risks of put selling.)

Itau Unibanco (ITUB) chart, with 200-day moving average.

Third, extending the position by six months let the trader collect an additional $0.45 of credit. Their maximum profit will occur if the stock’s above $17 on expiration in June. If that happens the entire position will become worthless and they’ll keep all the premium.

ITUB’s up more than 40 percent from its September lows. It’s followed a wave of optimism about Brazilian President-elect Jair Bolsonaro, who takes office on January 1. His surprise victory last month is expected to trigger a wave of investment in the country after years of socialist rule.

The put roll accounted for almost all the options activity in ITUB and pushed overall volume to more than twice the daily average.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.