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“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” – Warren Buffett
Last week it was the oil sector; now let’s discuss Brazil as seen through the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).
As I stated last week, over the next few weeks I want to offer, in my opinion, some of the best long-term investment opportunities I’ve seen in years. Most true long-term investors – particularly those of you who lean toward a contrarian point of view – should take these picks seriously. It might be years before they come to fruition. But that is OK. Some short-to-intermediate-term volatility should be expected. This is a long-term play – the type of proven play that has become rare among the most investors.
As Warren Buffett stated, “Be fearful when others are greedy, and be greedy when others are fearful.”
A Brazilian Discount
Brazil has taken a beating since mid-2014. But the precipitous decline has led to, in my opinion, a wealth of investment opportunities. Rather than just stepping in here and hoping for the best, I want to attempt to purchase shares of the EWZ fund – and a stock or two with Brazil exposure – for even less than where they are currently priced.
I can do so easily by employing a put selling strategy. By selling puts I can choose to lower the cost basis of the ETF or stock I wish to purchase, or use the proceeds as a form of income. In this case, I want to do the former. I want to own the asset for as cheap as possible.
Let’s start with the exchange-traded fund, EWZ.
As you can see in the chart above, EWZ is currently trading for $23.29. I could buy it here for roughly $23.29. Or as I mentioned before, I could sell puts at a lower strike price, lower the cost basis of the stock, and potentially have the opportunity to buy the ETF for a significantly cheaper price. I almost always side with the latter.
I want to buy the ETF for $21, or 9.8% cheaper than where it is currently trading. I can sell puts at the $21 strike and collect $0.52 for doing so. I can thus lower my cost basis even further, to $20.48, or 12.1% lower than where EWZ is currently trading.
If in 39 days at January options expiration EWZ closes above $21, I will re-evaluate the current state of EWZ and in most cases, simply sell more puts – thereby lowering my cost basis even further. My hope is that I can do this until I basically own the stock for next to nothing.
But realistically, I will be assigned the ETF at some point. Eventually EWZ will close below my chosen strike price. That’s OK. I want to own EWZ as a long-term holding in my portfolio.
Again, I know I can’t guess the bottom. But I do know that as a contrarian, when opportunities like this arrive, I am more than willing to take my chances at these levels, knowing time is on my side.
So what happens when EWZ closes below my strike price at expiration?
I’m simply assigned the stock at the strike price where I sold the puts, which in this case is $21. My cost basis is $20.48, or 12.1% lower than the current price of EWZ. Not a bad play for a contrarian investor with a long-term time horizon.
To learn more about selling puts and other high-probability options selling strategies, just click here.