Implied Volatility Over 150 in EWZ, the Brazil ETF
Truth be told, I could pick a ticker at random and have a compelling chart of implied volatility. Some, of course, are more compelling than others.
Take EWZ, for instance, the Brazil ETF. This resource-rich country has seen its ETF lose more than half of its value over the past year, coupled with a dramatic rise in volatility over the course of the past month.
In the chart below, courtesy of the International Securities Exchange, one can discern that implied volatility and historical volatility had been hovering in the range of 40 even as the ETF trended down during the summer. Starting in early September, the increase in volume in both the ETF and the options hints than an even wilder ride is coming.
In fact, implied volatility spiked from 40 to over 140, with historical volatility making similar gains. At the moment, both mean IV and HV are over 120, with both the near the money calls and puts expiring at the end of the week showing implied volatility readings in excess of 150. This is country risk at extreme levels.
Those with a directional preference who are looking to limit risk in high volatility environments may wish to look at bear call spreads for a short bias and bull put spreads for a long bias.
[source: International Securities Exchange]
[Disclosure: long EWZ at time of writing]
3 comments:
"This is country risk at extreme levels."
It is unfortunate that a bankrupt country like the USA is perceived as being a less risky investment than one which has made such admirable progress in resolving its foreign debt problems.
As the Brazilian saying goes, "O justo paga pelo pecador," or "The just pays for the sinner."
It is clear that some emerging-market countries are suffering unfair market consequences, and others deservedly so.
I understand that the spirit of your statement is correct, as you refer to perceived risk, and not real risk.
Oh, just one more thing.
I'd just like to confirm the implied conclusion: the falling value of EWZ represents a greater buying opportunity. (IMHO)
Standard caveats.
Hi 2win,
I happen to agree with all of your points and am long EWZ at the moment.
Cheers,
-Bill
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