Investor jitters are intensifying ahead of Brazil's presidential election runoff, sending hedging costs surging. While the base case expects Flávio Bolsonaro to maintain his first-round advantage over Luiz Inácio Lula da Silva, popular put options protecting against stock declines have doubled in price. Measures of local currency and equities volatility are at their highest levels since the pandemic.
As demand for bearish bets grows, prices have spiked, creating obstacles for investors seeking portfolio protection as polls indicate the race is tightening. The November $38 put on the iShares MSCI Brazil ETF was valued at $1.55 on Wednesday, more than double its price from three weeks prior following the first round. The options market skew has reached its widest point since Covid-19 in 2020, even as the ETF itself remained relatively unchanged.
The cost of protecting against index drops has risen so significantly that demand for call spreads has increased, suggesting traders are replacing cash market bullish positions with options bets. In the currency market, risk reversals measuring protection against a weaker real climbed to around 12%, the highest since 2008. This price spike has been aggravated by a technical factor: dealers who sold option structures to clients are now scrambling to hedge their own exposure, further pushing prices higher.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing