A jump of 86% in two weeks measures the wave of foreign bets on a Brazilian stock rally after the October election. The move sits in call options on the EWZ, the main Brazil-focused stock ETF traded in New York, which went from 2.8 million open contracts on August 24 to 5.2 million on Friday (September 4), according to Bloomberg data compiled by Valor Investe. For investors in Brazil, the volume matters because part of its effect can spill into the shares traded on the B3, the São Paulo exchange.
The size of the jump is easy to feel at the checkout: an item that cost 100 reais on August 24 would reach the register at 186 reais on Friday if it had matched the growth in contracts. It is the largest stock of such bets since 2007, the year the first iPhone came out, according to Bloomberg. The move tracks the tightening race: on August 24, when the BTG/Nexus poll showed President Lula at 46% and Senator Flávio Bolsonaro at 45% in a possible runoff, the EWZ had about 2.8 million open calls.
Bloomberg had already spotted, in late August, growing bets on Ibovespa and EWZ options meant to capture a rally in Brazilian assets should Flávio win, VEJA reports. The fund itself has climbed about 15% in the last three weeks, to its highest level since mid-May, according to the financial outlet The Kobeissi Letter. Part of the market reads a change of government as potentially positive for Brazilian stocks, on expectations of stronger commitment to public accounts and a friendlier agenda for privatizations, notes Valor Investe.
How the bet works
In brief: the EWZ, officially the iShares MSCI Brazil ETF, works as a slice of Brazil on the American exchange, holding shares of Vale, Petrobras and Itaú, among others, and lets a foreign investor buy into the country without trading on the B3. A call option works like a deposit on a house: you pay a fraction of the value today for the right to close the deal at a fixed price by a future date. If the price rises, the buyer profits; if it does not, only the deposit is lost.
The market's largest positions sit at strike prices of $43 and $45, expiring on November 20, almost a month after the possible runoff set for October 25. Together they add up to about 1.4 million contracts, according to a CryptoBriefing tally cited by Valor Investe. With the EWZ trading between $38 and $39, the contracts bet on gains of 10% to 19% over the current price, depending on the level and the reference day.
While calls nearly doubled since late August, puts, the options tied to protection or bets on a fall, stayed flat near 1.5 million contracts, according to VEJA. The put-to-call ratio fell to about 0.3, which in plain language means roughly three downside bets for every ten upside bets. That is an unusual imbalance in the options market for the Brazilian ETF.
What it means for Brazil
"What is behind this movement is mainly the positioning of foreign investors for the Brazilian electoral scenario," Heitor de Nicola, an equities specialist at AVIN, told Valor Investe.
"The result ends up triggering what the market calls the 'electoral trade', with foreign investors building positions in the EWZ with an eye on a possible change of power," says Juliana Benvenuto, allocation and intelligence coordinator at Avenue.
The effect can reach the B3 through the market's plumbing. "As these positions are built and the EWZ rises, market makers need to adjust their hedges, which can increase demand for Brazilian stocks," Nicola explains. The institutions selling the options buy the assets tied to the fund to protect themselves, and that extra demand feeds the rally.
The election does not explain the move on its own. The DXY index, which measures the dollar against a basket of major currencies, is below 100 points, a setting that tends to favor emerging markets, and oil has approached $100 a barrel amid Middle East tensions, which helps Petrobras, a company that accounts for about 14% of the EWZ portfolio, according to Benvenuto.
Not all 5.2 million contracts are pure bets on a Flávio win, since options are also used for protection and combined strategies, VEJA cautions. Alexandre Pletes, head of equities at Faz Capital, notes that part of the domestically driven shares still trade at a discount and that Bank of America recently recommended buying Brazilian stocks, though there is no consensus among the big international houses. For the Kobeissi Letter, a dollar recovery would be the decisive test for these bets.