Global bulls return to former Brazilian bigwig

Emerging markets are heating up, and yesterday a forgotten high flier got some love.

The MSCI Emerging Markets Index has gained 14 percent so far in 2017, twice the performance of the domestically focused S&P 500 over the same period. It’s also coming off its best quarter in five years and received a vote of confidence this week from famed investor Jeff Gundlach of DoubleLine Capital based on cheap valuations.1

Asian firms like Samsung, Alibaba (NASDAQ: BABA), and Tencent have mostly led the rally, but on Tuesday options traders turned to a Brazilian company that was once a top dog in the emerging-market space: oil driller Petrobras (NYSE: PBR). Acting in the blink of an eye halfway through the morning, they snapped up calls at two strikes: 

  • A block of 15,000 May 10 calls was purchased for $0.08. 
  • A block of 10,000 12-May 9.50 calls was bought for $0.12.

Calls fix both the price where investors can buy the underlying stock, and the time frame. A relatively small move can translate into some hefty profits if the stock goes in the right direction. But the options can also become worthless in a hurry if they’re wrong. 

The May 10s are standard monthlies, so they expire on the third Friday (May 19). They’ll double in value if PBR climbs 9 percent by then to $10.16, and triple from a 10 percent move to $10.24. Breakeven is at $10.08, and they’ll be worth nada, zilch … goose eggs if the stock fails to cross $10.

The other contracts expire even sooner – this Friday to be exact. Maybe they’re looking at the calendar, because that’s one day after the company announces first-quarter results.

Petrobras (PBR) 6-month chart

Source: OptionsHouse by E*TRADE

PBR has been on a wild ride since the last emerging-market frenzy in 2007-2008. It peaked over $75 at the time, but then proceeded to drop all the way down below $3 by early last year. The culprit? Experts fingered the toxic trio of falling oil prices, a heavy debt load, and political corruption scandals.

But there have been rays of sunlight more recently. S&P raised its credit rating in February, and JPMorgan upgraded the shares to overweight.2 Cost cuts gave management the green light to raise guidance the next month,3 followed by at least two more positive analyst moves (Credit Suisse on March 22 and Societe Generale on April 25). 

Bottom line: PBR reports earnings this week, and traders are looking for a gusher.


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1. CNBC: Jeff Gundlach makes bets against U.S. stocks, for emerging markets. 5/8/17.

2. Wall St 24/7: Why S&P Raised Rating on Petrobras and Still Stays Cautious on the Company. 2/11/17. 

3. Reuters: Petrobras debt, operational metric improve despite profit miss. 3/21/17.