Rousseff’s Win Turns Brazil ETF’s Calls Into Losers

Most state lottery tickets cost $1. PowerBall tickets cost $2. For barely more than the price of state lottery tickets and not much less than the cost of a PowerBall tickets, investors can try a different kind of lotto: Being long call options on the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).

EWZ and other Brazil ETFs tumbled Monday, a day after President Dilma Rousseff narrowly defeated challenger Senator Aecio Neves in Sunday’s runoff election. Rousseff’s win bludgeoned call options on EWZ as contracts on the largest Brazil ETF “for between $43.50 and $49.50 over the next month fell the most among all contracts traded on U.S. exchanges, plunging more than 98 percent to as little as 1 cent,” report Julia Leite and Oliver Renick for Bloomberg.

EWZ tumbled 5.4% Monday on well over double the average daily volume, notching its lowest close since April in the process. Not only did plenty of investors bet the wrong way on EWZ, as last week’s inflows of $630.4 million indicate, they bet the wrong way on the ETF’s options.

Last Thursday, the number outstanding options contracts in EWZ reached a record 5.6 million with traders holding roughly the same number of calls and puts, report Julia Leite and Denyse Godoy for Bloomberg. One ETF execution noted last Friday that there had been brisk activity in EWZ’s November $40 and $45 calls. [Bad Day Lurks for Brazil ETFs]

On Friday, EWZ’s November $40.50 calls closed at offer price of $3.55. At Monday’s, the offer price for that contract was 93 cents.

The best performing Brazil ETF on Monday was the ProShares UltraShort MSCI Brazil Capped (NYSEArca: BZQ), which surged 8.8% on more than five times the usual volume. That performance probably had some traders kicking themselves because BZQ did not see any money come in (or depart) in the week leading up Sunday’s vote in Brazil. [Traders Dodge Leveraged Brazil ETFs]