Update Aug 8th 2011: I am closing this position (below) with FXE at 141.74 and the Fly at .30 for a small gain……with the FOMC meeting tomorrow I am hard pressed to see anything that comes out of it as positive for the dollar, especially vs the Euro……the Euro clearly has it structural problems, but right now the Fed seems motivated to continue to print dollars in an effort to save our economy. This view has obviously changed in the last couple weeks.
Original Post July 25th, 2011:
First, my usual disclaimer about currency trading through equity options: I am no expert on currencies or macro trends and profess no specific expertise to correctly forecast them ….So there, I said it, but every so often I have an inclination on direction and like to make low premium tactical bets trying to isolate a specific move. The Euro (vs the U.S. dollar) has been a bit of a yo-yo for the past few months, being driven lower at times by the sovereign debt issues from its piggish members and only to be reversed by the race out of the U.S. dollar on our own debt issues. [private]
Technically the Euro is in a sort of orderly down channel making lower lows and lower highs…..I want to use the FXE, a very liquid etf created to track the performance of the Euro vs the dollar, to express a near-term bearish view.[caption id="attachment_3419" align="aligncenter" width="300" caption="6 month FXE chart provided by Bloomberg LP"][/caption]
My Sort Term View: once the U.S. gets their debt deal behind them, even the stop-gap kind, once again the focus should be on the potential for a sovereign debt contagion in Europe, which should send the Euro back to the 1.40 level which is support. As far as timing, I think this can all happen in the next few weeks as we are likely to get our situation settled in the next week which could cause the dollar to recapture some recent losses.
TRADE: FXE ($142.92) Buy Aug 142/140/138 Put Fly for .25*
-Buy 1 Aug 142 Put for 1.56
-Sell 2 Aug 140 Puts for a total of 1.86 (.93 each)
-Buy 1 Aug 138 Put for .55
Break-Even on Aug Expiration:
Worst case: above 142 lose all .25, btwn 142 and 141.75 lose up to .25
Profit: Btwn 141.75 and 140 with max gain of 1.75 at 140 (down 2%), profit trails off btwn 140 and 138
Lose .25 below 138.
TRADE RATIONALE: I want to make a near term play on the resolution of our debt ceiling without making a large premium outlay in case of disaster. This trade structure offers a 7 to 1 payout potential if the currency moves just 2% lower to support in a little over 3 weeks.
*USE LIMITS ON STRUCTURES LIKE THIS, THERE IS A TON OF BID ASK AND YOU DO NOT WANT TO USE MARKET ORDERS. FOR INSTANCE, WHEN THE STOCK WAS 142.92 THE SCREENS ON THIS SPREAD WAS .15 AT .32, I BID .25 AND GOT HIT.
**Also risk what you are willing to lose to make this play as transaction costs due to the 4 legs and the bid ask will make it very difficult to get out if you are just marginally right or wrong.