Nancy Davis Makes the Bear Case on Brazil

Published on
May 17th, 2018
15 minutes

Nancy Davis Makes the Bear Case on Brazil

Trade Ideas ·
Featuring Nancy Davis

Published on: May 17th, 2018 • Duration: 15 minutes

Nancy Davis of Quadratic Capital Management says the upcoming Brazilian election gives her ample reason to short the emerging market. She explains how she’s using options to bet against a popular Brazil ETF in this interview with Brian Price. Filmed on May 14, 2018. NOTE: An earlier version of this video contained erroneous information about the trade in the conclusion and in the final chart.


  • DI
    David I.
    6 July 2018 @ 22:31
    I am a beginner in trading options and still learning but have taken this trade. Could anyone please advise on possible actions to take with this trade? Would it be an ideal time to turn this into a put spread? And could we expect to see higher moves in EWZ in the coming months. Thanks for any advice
  • DI
    David I.
    6 July 2018 @ 22:31
    I am a beginner in trading options and still learning but have taken this trade. Could anyone please advise on possible actions to take with this trade? Would it be an ideal time to turn this into a put spread? And could we expect to see higher moves in EWZ in the coming months. Thanks for any advice
  • AG
    Abhimanyu G.
    18 June 2018 @ 01:25
    this has worked out beautifully - fantastic blend of theory + real world application more of Nancy please!
  • JC
    Joe C.
    11 June 2018 @ 14:28
    I agree with comments below on Nancy doing a longer-form video on Options trading. I know almost nothing about options and learned more about options from this video than most online resources I've found. "4 ways to win" is a unique take on how (put) options work... would love to watch a longer video on this topic alone.
  • RP
    Ryan P.
    8 June 2018 @ 16:25
    Why is EWZ Up today?
  • ND
    Nancy D. | Contributor
    1 June 2018 @ 16:24
    To provide an update on this trade idea, the EWZ is down -14.2% in 20 days and implied volatility is up +4 vol points. The ATM put would be up over 400%.
    • RP
      Ryan P.
      7 June 2018 @ 17:27
      Nice call Nancy. Was going to IB chat you on this but figured it would be more relevant here. Have been tracking Brazil ever since you mentioned this a month ago , situation does not look good IE. Petrobras highlighting some of the main issues your spoke about in the video. “Price for perfection” in an very imperfect environment. Feel free to come back for more ideas haha.
    • ND
      Nancy D. | Contributor
      7 June 2018 @ 17:47
      Thank you, Ryan, I appreciate your post.
    • ND
      Nancy D. | Contributor
      7 June 2018 @ 17:47
      Thank you, Ryan, I appreciate your post.
  • aa
    ariel a.
    25 May 2018 @ 23:09
    Shallow pitch. 1Min for your reading pleasure : 1) Inflation is the real only clear signal ->If the lack of investments from the last several years would now impede growth, then is trouble. Meanwhile, truckers fully indebted with a massive leverage on lories are idle in strikes and inflation is still dead. 2) This Central Bank is, by construction, Hawkish - No questions. 3) MDB can elect any president they choose. They vanished away PT party from all small towns in which voters tend to vote with 70 Approval rate to the incubemt party, its Coronel ( if you really want to play brl, read Celso Furtado) 4 and final) If you really want to bet smartly against brazil, bet like locals and carry massive amounts of USDBRL 2mo 25% Risk calls, hoping that one day you feel a bit sloppy and a massive 10% move happens when they are 30 DTM😝😝😝
    • ND
      Nancy D. | Contributor
      1 June 2018 @ 16:36
      Hi Ariel, I wanted to respond to some of your comments below: 1) Inflation is dead as we look in back the mirror. The economy is doing poorly, but inflation pass through effects from the currency depreciation, higher gas prices and the side effects from the truckers strike could push inflation higher with little growth to show. 2) This Central Bank is, by construction, Hawkish - No questions. - So?? 3) Wrong, This is no longer the case. The disbelief with the political class is so high that re-election or election of old politicians will be very difficult in 2018. MDB has a big problem this year with Temer’s enormous disapproval rate. Anecdotally, one off duty police officer that killed a thief became very popular in the past couple weeks and recently decided to run for the house – these are the kinds of candidates that are getting traction these days. The truckers’ strike started on May 21 after a government-sanctioned hike in diesel prices. But it quickly grew into something much bigger. WhatsApp posts showing striking truckers videos and other messages are calling for an end to Temer’s government. Bolsonaro has vowed if elected to appoint military officials to the cabinet positions, roll back human rights provisions and give security forces carte blanche to kill suspected criminals. Gen. Joaquim Silva e Luna, whom Temer appointed, told Bloomberg that he welcomed Bolsonaro's candidacy and Brazil is looking for someone with "values." 4 and final) That is indeed a good strategy specially now that the rate differential makes the carry less punitive. The currency is vulnerable to shocks, vol tends to spike, skew tends to rise. But with equities no longer being cheap, EWZ gets you both the currency and equities, with an attractive low correlation of ~25% earlier in May. During periods of crisis this correlation can jump up, further increasing the EWZ implied vol. A 25D USDBRL call would be up ~115% only in the same period compared to ~400% in EWZ put. There was little sign of any political consensus that could bring the difficult reforms and bold investments that Brazil needs to recapture the promise it showed last decade.
  • JJ
    Josh J.
    25 May 2018 @ 19:53
    Can we have more from Nancy please ?
  • CC
    Carlos C.
    21 May 2018 @ 00:43
    Didn’t the markets rally when Trump was elected?
    • SS
      Sophocles S.
      22 May 2018 @ 13:13
      Banks were also bearish about Lula in Brazil years ago and we made a killing going long.
  • KE
    Kathryn E.
    17 May 2018 @ 11:51
    Amazing understanding of option trading. I'll be extremely interested in a multi video option training from Nancy!
    • RW
      Richard W.
      17 May 2018 @ 16:05
      I really agree with this comment - her option understanding seems terrific and I would love her to do some training for us!
    • ww
      will w.
      20 May 2018 @ 06:25
      Whether or not Nancy does any option training presentations for RV in the future, you might get some of that (about options) from BigPicture Trading BigPicture's 'prime mover' is Canadian Patrick Ceresna. Patrick is now co-host of Erik Townsend's 'Macrovoices' weekly podcast.
    • ww
      will w.
      20 May 2018 @ 06:31
      Also, the CBOE (primary exchange for options on US-listed underlyings) has lots of options trading educational material. All, or almost all retail brokerages (Schwab, TD, Interactive Brokers, Fidelity, etc) have options training content. As does Investopedia.
  • BF
    Brad F.
    18 May 2018 @ 11:46
    Nancy this is the best trade idea video I have seen yet. And thanks for replying to comments - I would love to see more active engagement with the community from RVTV and its contributors.
    • ND
      Nancy D. | Contributor
      18 May 2018 @ 12:05
      Fabulous! Thank you!
    • DW
      Daniel W.
      19 May 2018 @ 21:02
      Totally agree
  • zy
    zhang y.
    19 May 2018 @ 16:35
    What's the difference between shorting the EWZ etf and the put options of it and which broker offers the options?
  • AM
    Artur M.
    19 May 2018 @ 09:46
    I was looking for a long USD option long term play. Looked at EEM & UUP but see more assymetry in EWZ. Thank you Nancy. Hope you can visit us soon again.
  • CD
    Christine D.
    18 May 2018 @ 23:10
    Interesting idea but looking at the EWZ chart it feels about 1 month late to do this trade. Seems too risky now to buy put options in my opinion. I will do the opposite and see what happens. Good luck to everyone.
  • AG
    Anubhav G.
    18 May 2018 @ 14:12
    Why not buy a calendar spread ?
    • ND
      Nancy D. | Contributor
      18 May 2018 @ 19:39
      We do not care for calendar spreads because that means selling one part of the vol curve to fund buying another part. Buying a calendar spread means you are selling gamma in the closer dated option contract to fund buying the longer dated contract. It's dangerous to do with a short exposure because in periods of risk off the vol curve in equities typically inverts meaning front dated vols move up more than longer dated vols.
  • SC
    Shane C.
    18 May 2018 @ 16:15
    Nancy, this is a very intelligent and efficient short play. I love Quadratic's thought process regarding their trades. Being short the Brazilian ETF is intrinsically shorting the BRL as well (reducing a carry trade risk)
  • LK
    Lyle K.
    18 May 2018 @ 01:49
    One of my favorite people to see on RV....I love Nancy’s views and trade set ups just awesome!
  • JL
    J L.
    18 May 2018 @ 00:48
    full interview please
  • GL
    Guillaume L.
    17 May 2018 @ 18:29
    Assuming skew is too flat, I understand tou ATM puts will benefit from increased call skew if your direction view realized itself but wouldn't you want a touch a way otm puts in there so that they benefit form rising put skew? (for extra kicker) Very good video. Cheers.
    • ND
      Nancy D. | Contributor
      17 May 2018 @ 22:43
      We prefer to own maximum gamma using ATM options for days like today... Then with large moves like today's down 3.7%, and then we manage our strikes and delta by rolling down. Options are not buy and hold. they need active management!
  • SH
    Steve H.
    17 May 2018 @ 21:29
    Seriously impressive.
  • PB
    Pieter B.
    17 May 2018 @ 20:12
    I found this a really professional video! Great Q&A! Massive thanks!
  • M.
    Milton .. | Founder
    17 May 2018 @ 17:04
    Hey everyone - Unfortunately there was a mistake in the original conclusion to this video. The expiry and price of the option were not correct. Thank you for bringing this to our attention. Over and out, Milton
    • CB
      17 May 2018 @ 19:20
      What were the correct expiry and price?
  • JG
    John G.
    17 May 2018 @ 15:07
    The 5 and 7 month at the money put options on EWZ look expensive to me. I am confused.
    • ND
      Nancy D. | Contributor
      17 May 2018 @ 16:05
      hi John, 6 month implied vol on EWZ has been in the range of 17.5 to 93.5 over the past decade. Currently the vol is priced around the 50th percentile but the skew for downside is even cheaper at about the 18th percentile. therefore we believe that owning the convexity is better than using put spreads that sell skew.
    • JG
      John G.
      17 May 2018 @ 17:21
      Thanks Nancy. The implied vol range and current vol help me better understand your thesis. I like the trade idea and will look for an opportunity to put it on on an EWZ bounce.
  • rr
    rlw r.
    17 May 2018 @ 17:16
    Brian is a great addition to Trades, thks RV. RV needs more Nancy on Options. A very useful 15 min!
  • WG
    Wade G.
    17 May 2018 @ 16:38
    So to JG's remark below, I think the issue here is that pricing and break even point provided by the host in the last minute are disconnected from the pricing I see and assume JG saw for the options. Not sure when this was filmed, but my chart shows these options never trading anywhere near the $.60 price provided by the host. Ms. Davis reiterates her rationale for liking the option pricing below, but that's not the concern here. There's confusion based on the details provided in the last minute of the video and the market prices a couple of us are seeing. Good interview, btw.
    • WG
      Wade G.
      17 May 2018 @ 16:48
      BTW, I assume the host grabbed a near term option mistakenly, because the 60 cents at the money doesn't make any sense.
  • JM
    Johann M.
    17 May 2018 @ 14:39
    Where does one get access to such cheap options. The current Nasdaq option chain for EWZ October 2018 for a strike price put is trading at $ 3.45 to $ 3.95?
    • CM
      Carlos M.
      17 May 2018 @ 16:11
      it is most def not 60 cents, the guy made a mistake.
  • JS
    Joel S.
    17 May 2018 @ 14:35
    The problem with this trade is that locals are actually buying stocks and buying USDBRL to hedge it. So one thing is offsetting the other. I don't know if the Bovespa will continue going higher, but giving so many players (particularly local hedge funds, which are big in Brazil) have this trade of long Bovespa + long USDBRL, an unwind of this could produce mediocre returns giving the offsetting nature of the trades. USDBRL was around 4,20 at the high of the Brazilian crisis, with Dilma being impeached, tremendous twin deficits and GDP plummeting. Now USDBRL is 3,70 and we are in a very different scenario. Hence unless we see some big shock i don't see the ccy going much higher here. The election play is still far away. A bit easier to see a stock market correction led by the s&p. But in that case EWZ might not be the best vehicle.
  • EQ
    Eduardo Q.
    17 May 2018 @ 13:18
    This came in the right moment. I hope some of you can help me figure this out. She mentions the Interest Rate differential between BR and US. Yesterday I was doing a relative Analysis for MXN, COP and BRL vs USD. Surprisingly... If you draw Interest rates and bond yield differentials between any of these 3 economies and the US vs the respective Ccy pairs, IR and BY differentials depict a negative correlation with the currency pair. That is, a (10Y USy - 10Y BRy) spread "should be" positive correlated to USD/BRL but that was not the case it was indeed positive correlated to the inverse of it BRL/USD. Same happened with USD/MXN and USD/COP. I even went deeper and for USD/MXN I calculated, GDP and BOP growth differentials. Both yielded the same outcome. Normally, performing this type of analysis with DM currencies, it works as it is supposed to work. Is there a reason for that?... I mean they are emerging markets, should they be treated differently?... y view at least on Yield differentials might be that when bond yields in Brazil rise that is sign of carry trade unwinding and therefore it would lead to a depreciation of the currency. I might be right, but for IR, GDP and BOP differentials I have no clue.
  • JJ
    Josh J.
    17 May 2018 @ 12:54
  • RD
    Rodger D.
    17 May 2018 @ 12:27
    Where are November options listed?
  • PU
    Peter U.
    17 May 2018 @ 11:42
    very good! She also resembles Lady Gagga
  • Nv
    Nick v.
    17 May 2018 @ 11:41
    Big fan. Great idea and Brazil is a big overweight in EM - crowded trades....
  • JS
    John S.
    17 May 2018 @ 11:04
    Best so far