Pair Trade Strategy with Options Spreads - FLRY3 and ECOR3Date: July 23, 2025 (based on closing data from 07/22 and intraday data from 07/23/2025)
Operation Horizon: Short-Term (ideally, to be closed before ECOR3's earnings report on 07/30/2025).
1. General Financial Market Overview:
To begin, it's crucial to understand the broader market environment in which we are operating.
Bullish Stock Market (IBOVESPA): The main Brazilian stock market index, IBOVESPA, stands at 135,656.64 points, registering a 1.62% gain for the day. This rise is not isolated; major companies like VALE3, ITUB4, ABEV3, BBDC4, and SANB11 are also in positive territory. This indicates a generally optimistic market sentiment at this moment.
Declining Volatility (VIX): The VIX, often called the "fear index" or a measure of implied volatility (the market's expectation for future price swings) for the US market, is at 15.4, with a 6.61% drop. A decline in the VIX generally suggests that uncertainty is decreasing and that the market anticipates less abrupt movements. For strategies involving "selling volatility" (like the credit spreads I intend to set up), a falling VIX is a favorable sign, as it means options might become "cheaper," or the premium received from selling them has a better chance of being retained.
Crucial Events (Earnings Reports): Keep an eye on the calendar! Ecorodovias (ECOR3) is scheduled to release its earnings report on July 30, 2025, and Fleury (FLRY3) on August 7, 2025. These events are volatility catalysts. This means that on the day of the release, stock prices can experience significant gaps (sudden jumps or drops). My short-term strategy of 6 days is smart, as it aims to close the ECOR3 operation before this risk materializes.
2. Individual Asset Analysis (ECOR3 and FLRY3)
2.1. Ecorodovias (ECOR3)
Current Price: R$ 6.79
Technical Analysis:
Dominant Trend: The hourly chart for ECOR3 shows a strong and clear downtrend that has been developing since early July.
Moving Averages: Both the price bars and the 8 and 20-period Simple Moving Averages (SMAs) are consistently red. This indicates that current prices are below the short-term averages, and the averages are sloping downwards. The SMAs (8 and 20 periods) are acting as "dynamic resistances," meaning the price attempts to rise but finds difficulty as it approaches these lines.
200-Period SMA (Long-Term): The 200-period SMA (cyan line) is well above the current price, reinforcing the long-term downtrend.
Stop ATR (Risk Management): The Stop ATR line (a tool that the "Junior Schewinsky Setup" indicator uses to suggest a dynamic stop point based on volatility) is positioned above the current price. This confirms the bearish view, as the Stop ATR, in this case, functions as a resistance and an exit point for those who are long, or a reversal point for those seeking selling opportunities.
Volatility Analysis (Options): The Implied Volatility (IV) for ECOR3 options is around 50.97%. This is considered extremely high, indicating that the market expects large future price movements for ECOR3. This high IV is a key point for my strategy of selling spreads.
2.2. Fleury (FLRY3)
Current Price: R$ 14.44.
Technical Analysis:
Recent Event: On July 21, FLRY3 experienced a sharp and significant price increase. This was driven by merger news, a "fundamental catalyst" that altered the perception of the asset's value.
Post-News: Since this surge, FLRY3's price has been lateralizing (consolidating) at elevated levels, around R$ 14.40.
Moving Averages: Although the 8 and 20-period SMAs are still green (indicating an uptrend), they are losing their slope and converging. This suggests that the strength of the short-term uptrend has diminished, and the asset is in a state of balance between buyers and sellers.
Stop ATR: The Stop ATR line is below the current price, acting as a dynamic support and indicating that the recent uptrend is still holding, despite the lateralization.
Volatility Analysis (Options):
FLRY3 options have Implied Volatility (IV) of 36.75% for FLRYH170 and 20.41% for FLRYH155. The FLRYT120 put option has an IV of 51.87%. The difference in IV between calls and puts and between strikes (the "volatility skew") is important and can be an opportunity. IVs are generally high for puts, and a bit lower for more distant calls.
3. Statistical Analysis: The FLRY3/ECOR3 Ratio (Pair Trade)
The Concept: "Pair Trade" is a strategy that aims to profit from the relative performance difference between two assets that have historically moved in a correlated fashion. The idea is that if the ratio between their prices deviates significantly from its average, it tends to "revert" back to the mean.
The Current Ratio: The chart of the FLRY3/ECOR3 ratio shows it is currently at 2.14.
Opportunity Identification: We observe that the ratio has reached the lower Bollinger Band on the daily chart. Statistically, this is a strong indication that the ratio is "oversold."
Expectation (Mean Reversion): When an asset (or a ratio of assets) reaches the lower Bollinger Band, the expectation is that it will tend to revert to its mean, meaning the FLRY3/ECOR3 ratio is expected to rise again.
Implication of a Rising Ratio: For the FLRY3/ECOR3 ratio to rise, one of the following scenarios (or a combination) could occur:
Ideal Scenarios: FLRY3 rises while ECOR3 falls, or FLRY3 rises more than ECOR3, or FLRY3 falls less than ECOR3, or even FLRY3 remains stable while ECOR3 falls.
4. The Proposed Options Strategy:
My strategy involves setting up two options credit spreads.
4.1. In ECOR3: Bear Call Spread (Credit Spread)
Objective: To profit from the decline or sideways movement of ECOR3 while time passes.
How it Works: I will Sell an OTM Call (ECORH720) with a strike of R$ 7.20 (premium R$ 0.18) and Buy a further OTM Call (ECORH800) with a strike of R$ 8.00 (premium R$ 0.04).
Net Credit Received: R$ 0.18 (Sell) - R$ 0.04 (Buy) = R$ 0.14 per unit.
Maximum Profit: R$ 0.14 per unit (occurs if ECOR3 closes below R$ 7.20 at expiration).
Maximum Loss: (Long Strike - Short Strike) - Net Credit Received = (8.00−7.20)−0.14=R 0.80 - R$ 0.14 = R$ 0.66 per unit. (occurs if ECOR3 closes above R$ 8.00 at expiration).
Break-Even Point: Short Call Strike + Net Credit Received = R$ 7.20 + R$ 0.14 = R$ 7.34. Above this value, I start incurring losses.
Alignment with Analysis: This leg of the strategy is very well aligned with the downtrend we observe in ECOR3 and with the idea that ECOR3's decline would contribute to the rise of the FLRY3/ECOR3 ratio.
4.2. In FLRY3: Bear Call Spread (Credit Spread)
Objective: To profit from the decline or sideways movement of FLRY3 (specifically, if it stays below R$ 15.53).
How it Works: I will Sell Call FLRYH155 (Strike R$ 15.53, last offer price R$ 0.21) and Buy Call FLRYH170 (Strike R$ 17.03, last offer price R$ 0.03).
Net Credit Received: R$ 0.21 (Sell) - R$ 0.03 (Buy) = R$ 0.18 per unit.
Maximum Profit: R$ 0.18 per unit (occurs if FLRY3 closes below R$ 15.53 at expiration).
Maximum Loss: (Long Strike - Short Strike) - Net Credit Received = (17.03−15.53)−0.18=R 1.50 - R$ 0.18 = R$ 1.32 per unit. (occurs if FLRY3 closes above R$ 17.03 at expiration).
Break-Even Point: Short Call Strike + Net Credit Received = R$ 15.53 + R$ 0.18 = R$ 15.71. Above this value, I start incurring losses.
Alignment with Analysis: This leg of the strategy profits if FLRY3 stays below R$ 15.53 or falls. This is not the ideal scenario for the FLRY3/ECOR3 ratio to rise, which would typically expect FLRY3 to perform strongly. If FLRY3 does rise significantly and breaks above R$ 17.03, this leg could incur a substantial loss or offset gains from the ECOR3 leg.
Combined Strategy Net Credit/Debit:
Net Credit Received from ECOR3 Spread: R$ 0.14
Net Credit Received from FLRY3 Spread: R$ 0.18
Net Result of the Combined Operation (before brokerage): R$ 0.14 (received) + R$ 0.18 (received) = I RECEIVE R$ 0.32 per pair of units when I open the trade.
Total Brokerage Cost: R$ 18.00. This is an additional cost that will reduce my net profit.
5. The Role of Greeks (Theta and Vega) in this Strategy
"Greeks" are measures that help me understand how the price of an option or an options strategy reacts to different market factors.
Theta (Time Decay):
ECOR3 (Bear Call Spread): Theta is positive for selling spreads. This means that with each passing day, if ECOR3's price remains within my profit range (falling or consolidating below R$ 7.20), my position gains value. Time is "working in my favor".
FLRY3 (Bear Call Spread): Theta is positive for selling credit spreads. This means that with each passing day, if FLRY3's price remains below R$ 15.53, my position gains value. Time is "working in my favor" on this leg as well.
Combined Impact: Both legs of my strategy now have positive Theta, which is very favorable. This means time decay is "working in my favor" on both ends, contributing to the operation's profit as time passes, provided the asset prices remain within the spreads' profit ranges.
Vega (Sensitivity to Implied Volatility):
ECOR3 (Bear Call Spread): Vega is negative for selling spreads. This means that if the Implied Volatility (IV) of ECOR3 options decreases, the value of my position increases (I profit).
FLRY3 (Bear Call Spread): Vega is negative for selling credit spreads. This means that if the Implied Volatility (IV) of FLRY3 options decreases, the value of my position increases (I profit).
Combined Impact: Both legs of the strategy now have negative Vega. This is highly favorable in a declining VIX environment, as I benefit doubly from the reduction in implied volatility in the options market.
6. Risks and Management
Cost of the Operation: I'm receiving a net credit of R$ 0.32 per pair of units, but I also have a flat R$ 18.00 brokerage cost. This needs to be factored into the overall profitability. This means I don't need favorable asset movement to turn a profit.
Earnings Events (ECOR3: 07/30): Earnings reports are times of high uncertainty. They can cause huge gaps that can lead me to maximum loss very quickly.
Action: I'm strongly considering unwinding this operation (closing the position) on the last trading day before ECOR3's earnings report (July 29, 2025). This eliminates the gap risk.
Hedge: Since both assets are correlated to Ibovespa Index, I've use their Bheta to estimate a 1:1.25 ratio in the assets needed to be as close as possible to delta zero.
7. Final Conclusion:
"This pair trade strategy, utilizing a Bear Call Spread on ECOR3 (betting on a decline/sideways movement) and a Bear Call Spread (sold) on FLRY3 (betting on sideways movement/decline below R$ 15.53), aims to capitalize on positive time decay (Theta) and decreasing implied volatility (negative Vega) in both assets . Although the statistical analysis of the FLRY3/ECOR3 ratio suggests a relative rise in FLRY3, my setup on FLRY3 benefits more from stability or a decline in that asset, that's the reason I've choose strikes far from the price.
Strengths: Both legs are credit spreads, generating an initial premium receipt. Both benefit from positive Theta (time decay working in my favor) and negative Vega (decreasing volatility working in my favor). The declining VIX environment is favorable.
Weaknesses: There's a potential misalignment between the directional thesis of the FLRY3/ECOR3 ratio (which suggests FLRY3 rising) and the sold FLRY3 leg (which profits from FLRY3's stability/decline), that's the reason I've choose strikes far from the price.
Most Critical Point: The proximity of ECOR3's earnings report on 07/30/2025 is the primary risk. I will be closing the operation before this event to avoid gaps.
