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.)
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.
