Brazilian energy titan Petrobras (NYSE:PBR) was tied to a tree and shot on Monday with shares hemorrhaging 8.98% to close at $17.84, and this was on good news.
We set a hypotheitcal trade last week noting that rumors swirled that Brazil would allow increased fuel prices in their highly regulated markets. Well, Brazil announced modest increases of less than 10% last Friday and shares of PBR tanked. Some analysts were looking for 15% increases and the market clearly disapproved.
Our trade, dubbed the Brazilian Strangler, was a bet that shares would move dramatically up or down from where they traded. We took a position in the Jan 2013 $18 put and $22 call. At the time both of these strikes were out of the money. The asking price for the call was $1.45, and the put was $1.46
With the move to $17.84 the put is now in the money and the call is further out of the money.
That's a +.60 for the put and a -.28 for the call. If this trade is actually going to be very profitable then PBR will have to sink a lot more than that, but this big day's move shows the strangle starting to work (if it ends up working).
Strangles are a risky way to play volatility and allow us to profit regardless of which way a stock moves, provided the move is large enough. We will continue to monitor the movements of the Brazilian Strangler. Until then, better sleep with the lights on.
Here are some other energy names for risk tolerant investors to consider for this strategy: Arch Coal Inc (NYSE:ACI), Alpha Natural Resources, Inc. (NYSE:ANR), Apache Corporation (NYSE:APA), Baker Hughes Incorporated (NYSE:BHI), Peabody Energy Corporation (NYSE:BTU), Chesapeake Energy Corporation (NYSE:CHK), ConocoPhillips (NYSE:COP), Chevron Corporation (NYSE:CVX), Devon Energy Corporation (NYSE:DVN), Enbridge Energy Partners, L.P. (NYSE:EEP), EOG Resources, Inc. (NYSE:EOG), Halliburton Company (NYSE:HAL), Hess Corp. (NYSE:HES), Linn Energy, LLC (NASDAQ:LINE), Marathon Oil Corporation (NYSE:MRO), National-Oilwell Varco, Inc. (NYSE:NOV), Plains All American Pipeline, L.P. (NYSE:PAA), Petroleo Brasileiro SA (ADR), Penn West Petroleum Ltd (NYSE:USA) (NYSE:PWE), Royal Dutch Shell plc (ADR) (NYSE:RDS.A), Seadrill Ltd (NYSE:SDRL), Schlumberger Limited. (NYSE:SLB), Statoil ASA (ADR) (NYSE:), Suncor Energy Inc. (NYSE:SU), TOTAL S.A. (ADR) (NYSE:TOT), Valero Energy Corporation (NYSE:VLO), Exxon Mobil Corporation (NYSE:XOM)
Disclosure: I am long ACI.