Brazil Traders Just Made a Huge Bet in Currency Options Market

(Bloomberg) -- Brazil options traders seem to be gearing up for a sudden surge in currency volatility.

Investors bought $1.4 billion of contracts Tuesday that will pay off if the real swings significantly over the next week from its current price near 3.5 per dollar, already the lowest in 11 months. Trading volume was 25 times the average over the past two weeks, according to data from the exchange. Just seven trades were recorded, indicating the buyers were making large wagers.

Brazil Traders Just Made a Huge Bet in Currency Options Market

While investor anxiety in Brazil has been focused on the October presidential elections, which some analysts fear could derail the painful overhauls needed to shore up the budget, the surge in options buying suggests the concern is more near term.

One possible worry is that upcoming testimony from Antonio Palocci, a finance minister under jailed former President Luiz Inacio Lula da Silva, will implicate new companies in the massive Carwash graft scandal that’s roiled Brazil over the past three years. Investors may also be concerned that a recent Supreme Court move will give Lula, who is currently in jail on corruption charges, a chance at getting out in time to seek another term in office.

“That would cause a market panic,” said James Gulbrandsen, a Rio de Janeiro-based money manager who helps oversee $3.5 billion at NHC Capital and has bought protection against a selloff in Brazilian equities. “I suspect larger players are hedging against that possibility.”

Brazilian investor anxiety, as measured by the real’s one-week implied volatility, hit the highest since early this year the day after the positioning change in USD/BRL call options with a 3.5 per dollar strike price that expire April 30. The real has dropped 10 percent since late January, the worst performance in the world after Russia’s ruble.

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