2nd TRADE UPDATE Jan 11th 2012 at 2:45pm: Since entering this trade on Nov 28th, the Euro is down about 4.5% vs the US dollar which for a currency is fairly sizable move. Now with the Euro very close to the 52 week lows in front of tomorrows mornings ECB meeting I will take the profits on the balance of this position and look to re-enter the Euro short on a rally. With FXE at $126.54 I sold the second half of this position at 3.15 (paid 1.23) for a 1.92 gain on the second half.
A fundamental rule of trading is to let you profits run, and in this case with FXE close to the mid point of the spread with a week and half to go to expiration and a potential major market moving event tomorrow I think it is prudent to take the money and run.
TRADE UPDATE DEC 14th, 2011 at 3:42pm: Since initiating my short exposure in the Euro on Nov 28th, the currency has sold off to support about 3% in that time period. The FXE Jan 130/125 Put Spread that I paid 1.23 can now be sold at a 1.70. I am selling half of the position here.
Technically the currency has come back within 1% of the 2011 low and appears to be sitting on a downtrend channel that could serve as some near term support. I think there is a good chance we could see a technical bounce from current levels…..I will look to add at higher levels, sentiment has turned amazingly negative in a very short time and if the EU comes up with any quick solutions the EURO will def see a short covering rally.
Update Nov30th, 2011: With the news this morning that the U.S. Fed led coordinated central bank action to to cut dollar funding costs, the Euro is up about 1.4% . In some ways this news is a decent test for the strength of the currency and will likely give me more conviction on my bearish trade detailed in the post below from Monday. 1.35 remains an important resistance level for the Euro vs the dollar and if it can’t hold these levels on the upside I will look to add to this position in the FXE.
Monday, the Euro opened up on the rumor of the IMF loan for Italy and then spent the rest of the day giving back gains as the equity markets held them. If this happens again today then we know the direction of this trade.
Original Post Nov28th, 2011: FXE: If the Euro is Toast, Let’s Find A Way to Play With Defined Risk
With the world equity markets screaming today, there is one thing that sticks out to me like a sore thumb, The Euro vs the U.S. Dollar only up 57 bps. At the very least on a sentiment basis the currency should be trading much better than it is today given the recent 6.5% sell off in 2 weeks.
Technically, (I will use FXE to express my view, the ETF that tracks the Euro vs the Dollar) if it breaks 130 in a meaningful fashion you could see this thing make a quick move back to the 125 support level.
Not A ton new here but this was a great article from the Economist last week that helped reinforce my views
A downturn of such severity will hugely increase the pressures within the zone. Investors will be even less willing to finance banks, as more garden-variety loans to businesses and householders turn bad. As unemployment rises, tax receipts will go down and welfare payments up, making it harder for governments to rein in their deficits and hit the targets they have set, and causing bond markets to question their solvency more pointedly still.
In such circumstances, the chances of a policy error or broader panic increase sharply. The calculations of bond investors, bank depositors and politicians are prone to sudden change. Hopes that the fracture of the euro zone might be averted by far-sighted policymakers could give way to a belief that it is inevitable. Such beliefs, once they take hold, are likely to be self-fulfilling.
How? The drying-up of funding for sovereigns and for banks is a threat to the integrity of the euro, because of the stark divide between debtor and creditor countries within the zone. As late as March 2010, Jean-Claude Trichet, then head of the ECB, boasted that simply belonging to the euro area automatically ensured balance-of-payments financing. It doesn’t look that way now.
Again I am no macro expert, but want make a defined risk bet that the Euro sees lower lows in the weeks to come. If it can’t get going on a day like today when will it ever without any real news? So here’s the trade:
TRADE: FXE (132.70) Bought the Jan 130/125 Put Spread for 1.23
-Bought 1 FXE Jan12 130 Put for 2.36
-Sold 1 FXE Jan12 125 Put at 1.13
Break-Even on Jan12 Expiration:
Profits btwn 128.77 and 125 make up to 3.77, with max gain of 3.77 at 125 or lower.
Losses btwn 128.77 and 130 lose up to 1.23 and max loss of 1.23 above 130.00