Options market bets on a Brazil comeback post-election
By Saqib Iqbal Ahmed
NEW YORK Oct 2 (Reuters) - The prospect of leftist Dilma Rousseff winning another term as Brazil's president has caused investors to flee Brazilian markets, but bets in the U.S. options market suggest the selling may have run its course.
Citizens in Latin America's largest economy will vote on Sunday, with polls showing Rousseff solidifying her lead over opposition candidate Marina Silva, who is looking to put an end to 12 years of Workers' Party rule.
In recent weeks, the ups and downs in the heavily-traded Brazil iShares ETF, oil giant Petrobras, and other top Brazilian companies listed in the United States have been driven more by presidential polls than company fundamentals.
That's turned that market into a wild place. The iShares MSCI Brazil index fund has plunged about 21 percent since the beginning of September and volatility has risen sharply as the election approaches.
The market rallied in August when Silva, an environmentalist with pro-market credentials, entered the race and surged in the polls, leapfrogging centrist candidate Aecio Neves, as she found support from voters dissatisfied with the weak economy and Rousseff's policies.
Since then, Rousseff has regained the lead. As the market has dropped, though, the volume of call options - generally used for bullish bets - have risen. Growth in outstanding calls on the iShares MSCI Brazil ETF in September outpaced the growth in put activity.
"This drop is definitely overdone. Nothing has changed fundamentally that would justify this kind of move," said Charles Sizemore, chief investment officer at Sizemore Capital Management, a Dallas-based investment firm, which owns the EWZ ETF.
In September, call volume outpaced put volume in the EWZ, with about 1.677 million calls versus 1.672 million puts. By comparison, July and August showed an average of 950,700 puts and just 816,000 calls, according to Trade Alert data. Continuación...