Smaller size this week: 2 percent of the account at risk instead of 5. A single call has no stop here: the price paid is the whole risk, so the position is sized for losing all of it.
What Is a Long Call. You buy a call at 34 for 212 dollars per contract. That price is the most you can lose.
Enter it as a limit order at the mid, day order. A few cents more is fine to get filled.
The Setup
On Sunday, October 25, Lula won Brazil's runoff with 51.8 percent after trailing in the first round, a result prediction markets had put at about one in five. On Monday EWZ, the big Brazil fund, fell 19.8 percent, its worst day since March 2020. Ibovespa futures dropped 20 percent and hit a circuit breaker, and the real lost as much as 11 percent. At the low the fund was down 26 percent; it closed almost 9 percent off that low.
Crashes on one surprise often overshoot. The fund gave back two months of gains in a day and closed back at its August level. Its options did not panic with it: the January calls price about 31 percent volatility, less than the fund moved before the vote. So I buy one January call, a small bet on a partial bounce with the worst case fixed at the price paid.
Where You Win, Where You Lose
EWZ long call, 2.12 debit: the grey line is the profit or loss at expiry, the orange curve on Dec 6, about halfway to expiry, with the breakeven at 35.20. Max loss $212, max gain open-ended per contract.
What you are betting. You are betting that the fund wins back about 8 percent, to around 37, before the selling resumes. Reached by late November, that is worth about 70 percent on the money at risk; at 38 it is about double.
When we are wrong, and what we do then. The story breaks if Monday's low gives way, a close about 8 percent down: then the market sees a fiscal crisis, not a scare. Even so we do not sell: the call can recover into January, and the price paid is the whole risk. The exit rule: when the shares close above 37 the target is reached and we sell the call; otherwise we sell it on expiry day, January 15, before the close, so it is never exercised into shares. The price paid is the whole risk.
The Chart
Brazil (EWZ), daily candles over six months with the 40, 50 and 200 day averages. The dashed line is the breakeven on Dec 6, 35.20; above it the trade is in profit.
Trend: down 20 percent on Monday and 22 percent under the October 5 high, back at its August level, still up 7.5 percent this year and under its 40 and 50 day averages (EMA40 and EMA50 as drawn).
Levels: the target near 37 is where the 200-day average sits and half the crash is regained; Monday's low near 31.40 is the line that breaks the story.
The Big Picture
The big houses split on what comes next. UBS sees Brazilian stocks falling another 10 to 15 percent, and JPMorgan cut Brazil's currency and rates to market weight. Société Générale is looking to buy the real at 5.70 to 5.75 per dollar, and Brown Brothers Harriman sees a buying opportunity in the selloff.
My target is modest: the zone around 37, about 8 percent above Monday's close, where the 200-day average sits and half the crash is regained. A bounce of that size needs no good news, only for the forced selling to stop. Lula also faces a Congress that leans right, which limits how far he can loosen spending.
Three Things That Matter Before Jan 15
Société Générale says markets may stabilize quickly if the finance minister keeps stressing fiscal discipline. A credible budget signal could lift the fund fast; a vague one keeps the pressure on while time eats the call's value.
Flávio Bolsonaro wants the runoff annulled over a two-hour voting extension; UBS calls the request unlikely to hold water. A long legal fight would keep a risk premium on Brazil and slow any bounce.
Earnings land inside the trade: Vale reports on October 29, Itaú on November 3 and Petrobras on November 10. Big holdings reporting early can move the whole fund before the political story settles, in either direction.
Sources: Polymarket, Oct 25. Brazil's Superior Electoral Court, Oct 26. B3 and market data, Oct 26. UBS, Oct 26. JPMorgan, Oct 26. Société Générale, Oct 26. Brown Brothers Harriman, Oct 26. Company calendars, Oct 27. Prices: mid quotes, Oct 27.
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