One of the most interesting “smart money” trades we came across yesterday was with Ishares Msci Brazil ETF (NYSEARCA: EWZ).
If you’re new here, a “smart money” trade is a relatively large volume option trade most likely made by a pro trader. The idea is to analyze unusual options activity, identify an interesting “smart money” trade, and then make our best guess as to:
- Which direction the trader thinks the stock is headed
- How much they think it will rise (or fall), and
- In what time frame this will all happen.
If we like what we see after putting all these pieces together, we can mimic the “smart money” trade (on a smaller scale), and potentially ride alongside our pro trader to profits. With all this in mind…
A Pro Trader Just Bet $2,112,500 that EWZ will Stay Bearish For the Next 3 Weeks
On Monday, May 02, 2022, a pro trader seems to have bought 2,500 of the May 20, 2022, $40 put options on EWZ for $8.45 per contract. His outlay was $2,112,500.
EWZ – Option Trade
The trade’s breakeven point is at $31.55, meaning that EWZ needs to decline to $31.55 for the put option trade to break even. This is near the stock’s previous close of $31.63. And then for every $1 the stock falls below $31.55, our “smart money” trader will make $250,000!
On analyzing the chart of EWZ, the stock seems to have broken down from an upward sloping trend channel (marked as blue color lines). It is also currently trading below a support-turned-resistance area (marked as a pink color dotted line). All this makes it likely our pro trader is bearish on EWZ.
EWZ – Daily Chart
This lends credence to our conclusion that the pro bought these put options, as opposed to selling them.
If you agree and would like to mimic this trade, here’s how:
Buy to open the May 20, 2022, $40 put options on EWZ for $8.45 per contract or better.
As always, depending on your risk appetite, do remember to set a stop-loss for the options trade to avoid significant losses.
Happy Trading!
— Trades of The Day Research Team
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