Trade Update FXE: Closing Half May Put Fly for a Triple, Looking to Roll Out On a Bounce

by Dan May 15, 2012 9:50 am • Commentary

Trade Update May 15th, 2012 at 10:03am:  Since buying this May 129/125/121 Put Fly for .56 about a month ago, the FXE is down about 2.4%, which doesn’t seem like a lot, but for a currency move is not too shabby.  Frankly given the increasingly negative news out of Europe, I am surprised that the Euro is not trading back to the 2012 lows.   With the etf trading at 127.20 (at 4 month lows)  and 3.5 days to May expiration, I am going to take half of this position off 1.68 for a triple and let the other half ride.  This way no matter what happens btwn now and Friday, I can’t lose and I have locked in gains.


Original Post April 18th, 2012: New  Trade FXE: Everyone Expects the Spanish Auction

Global markets have found some relief the past few days on successful debt auctions out of Spain. Spain auctioned off 12 and 18 month notes overnight, by most accounts the auction was a success.

Spain’s 10-year yield decreased 10 basis points, or 0.1 percentage point, to 5.78 percent at 11:22 a.m. London time. The 5.85 percent securities maturing in January 2022 climbed 0.755, or 7.55 euros per 1,000-euro ($1,309) face amount, to 100.455.

Volatility in Spanish securities was the second-highest among euro-area debt markets after France, according to measures of 10-year bonds, two- and 10-year yield spreads and credit- default swaps compiled by Bloomberg.

Spain will auction 2 and 10 year notes on Thursday. Most market observers deem this to be a more important gauge of everyone’s appetite for Spanish debt, particularly the 10 year note as it is well outside the ECB’s 3 year loan guarantee. Spain is caught in a wild austerity experiment as they try to get control of their account imbalances during a time when unemployment rates and growth are horrible. From Reuters:

the country [Spain] has an overall unemployment rate of 23.6 percent and a youth unemployment rate over 50 percent.


MY VIEW: 3 main reasons why I think a defined risk Euro short makes sense over the next month:

1)  Spanish debt situation worsening – banking crisis there is much more entrenched than in Italy last year, much harder to resolve banking systemic issues with words rather than new capital

2)  Psychology of the 1.295 – 1.30 level for market participants is crucial.  Anyone long Euro this year is still up on their position, changes on a  break of that level

3)  European banks are down 20% from recent highs (SX7E), and near the lows of last year, even after LTRO 1 and 2.  Investors have rapidly been losing faith in the European financial system, and the U.S. action in 2007-2008 was a good example that people need to regain faith in the capital status of the banking system before the all clear signal can be given


TRADE: FXE ($130.45) Bought the May 129 / 125 / 121 Put Fly for .55

-Bought 1 May 129 Put for .94

-Sold 2 May 125 Puts for a total of .44 (.22 each)

-Bought 1 May 121 Put for .05

Break-Even On May Expiration:

Profits btwn 128.45 and 121.55, max gain of 3.45 at $125 (or ~6.27 to 1)

Losses of up to .55 btwn 128.45 and 129 and btwn 121.55 and 121, with max losses of .55 above 129 or below 121.

Technically the chart is at a crucial spot as suggested above…..$130 serving as a huge support level, I am not sure the pattern of lower highs and lower lows will serve the trend line from the Jan low well in the weeks to come.

7 Month FXE chart from Bloomberg



*The Bid /Ask on this Fly is wide, So Used a Limit as always….for instance the spread is .40 at .61 and I put in a .55 bid and got executed, never use market orders in multi-leg spreads.

*Also you would only do this if u agreed with the above rationale and thought that the almost 6.5 to 1 potential payout offers enough reward to risk .55 premium if the ETF does not fall 1.5% in the next month.