When implied volatility on the Brazil ETF (NYSEARCA: EWZ) went through the roof earlier in the month, I took notice.
Having previously hovered around the 25-30% mark for most of the year, the spike to nearly 60% was huge.
Sure, the ETF had experienced a rough run and Brazil is renowned for political turmoil, but 60% implied volatility and juicy option premiums were too tempting to pass up.
EWZ Volatility Chart
I was actually a little early on the trade, entering on August 29, when IV was at 48%, but the trade still worked out well.
Date:Â August 29, 2018
ETF Price:Â $32.91
Trade Details:Â EWZ Short Straddle with Delta Hedge
Sell 3 EWZ Oct 19th $33 calls @ $2.33
Sell 2 EWZ Oct 19th $33 calls @ $2.46
Premium:Â $1,437 Net Credit
Buy 17 shares at $32.91 = -$559.47
Here is the initial risk graph:
By September 5, EWZ had declined and the positive had positive delta of 65, so I sold 65 shares at $31.18 to get back to delta neutral.
On September 19th I bought 20 shares at $32.52.
As of September 25, the trade is sitting at +$391 with the Straddle declining from $1,437 to $930 while I’ve made a loss of $116 on the shares used in the delta hedging.
I’ll be looking to exit the trade soon, perhaps if it gets to +$500.
The video below explains the process if you would like to see another example. I really like using this strategy when I see a stock or ETF with really high implied volatility compared to the previous 12 months.
VIDEO
Twitter: Â @OptiontradinIQ
The author does not have a position in mentioned securities at the time of publication. Â Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
