High Put/Call Ratios on Brazil: Bearish Bets?

By Richard Bloch

I saw a Bloomberg article suggesting that “options traders are placing more bearish bets” on the iShares Brazil ETF (EWZ), noting that the ratio of put options to call options is at a three year high.

The ratio of put options to sell the iShares MSCI Brazil Index Fund versus calls to buy has jumped 55 percent in the past two months to 1.72 yesterday and on Feb. 3 reached 1.81, the highest level since January 2008.

I took a look just to see for myself. Here’s a chart showing the open interest on puts vs. calls going back to mid-2008 – along with a chart showing implied volatility for this ETF:

Sure enough, this ratio does seem to be near three-year highs or around 1.75. Interestingly, however, implied volatility for EWZ options overall seems to be near the lows of the timeframe.

I generally don’t follow put/call ratios, so I asked Adam Warner, who writes the Daily Options Report, for his thoughts.

He explained that in general, the ratio of puts to calls for individual stocks may not be meaningful because it’s difficult to tell just from this data whether put buying represents “bearish bets” or a hedges for protecting long positions.

Plus he noted that open interest figures can include “stale” out-of-the-money puts that could have been purchased long ago, have little value, yet still show up as open interest.

And as Adam explains in his book, Options Volatility Trading, when it comes to individual stocks, calls can often be puts in disguise and puts can be calls in disguise when transactions are combined with the purchase or sale of stock (such as a covered call, for example).

Individual stock – or index?

But EWZ is not strictly what I’d call an “individual stock.” According to Bloomberg, this is one of the world’s top-traded funds:

The Brazil ETF, which is also known by its EWZ ticker symbol, has a record 172 million outstanding shares, up 14 percent from a year ago. The fund’s options ranked 20th for volume in the U.S. last year among about 3,700 stocks and indexes with listed contracts, according to the Options Clearing Corp.

So in a sense, you could view options on EWZ as almost “index options,” which could put a different spin on whether the put/call ratio offers valuable insight.

Interestingly, however, there are just three companies in this ETF that account for more than 45% of its holdings. These include Petrobras (PBR), Vale (VALE), and Itau Unibanco (ITUB).

So what does the options open interest for these stocks look like in terms of puts vs. calls? Here are charts for the options on these individual stocks (at least for those traded in the U.S.)

Looking at the past three years, it appears that the put/call ratio for Petrobras isn’t exceptionally high. As for Itau, it’s hard to tell given the spike in 2009 (although I should note that these options are more thinly traded). But it does look like the put/call ratio for Vale is growing higher, and experienced a recent spike to near 1.25.

Actually, that might make some sense if you look at charts for these stocks

Petrobras has been mostly rangebound for several months, more than 20% below its 2010 high. Itau is roughly midway between its 2010 high and low. But Vale recently made new two-year highs.

Could the rising put/call ratio for options on Vale reflect concern that the stock may be overextended? Possibly, but I wouldn’t rely on this ratio alone. And there are plenty of fundamental reasons why investors may be skittish on investing in Brazil and emerging markets in general.

Bloomberg quotes Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore as saying:

“Inflationary pressures are causing people to get a little jittery … A lot of people are getting behind U.S. equities and we’ve seen a big rotation out of emerging markets.”

So watch the implied volatility for those options on EWZ. It’s under 30% right now, but when people move from “a little jittery” to even “moderately jittery,” that volatility could start rising again.