New Trade FXE – Euro Mayhem, Take 99

by Enis June 18, 2012 11:39 am • Commentary

The Euro since 1975 was one of my first contributions to RiskReversal back in early May.  It’s been a multi-year thesis of mine that we will see capital outflows from Europe.  As an alternative to the U.S. dollar, the Euro has failed.  We are witnessing its failure in real-time.  And I want to be positioned accordingly.  

To me, the most negative aspect of the news over the past 2 weeks for the Euro has been its own price action.  The Euro is trading around 1.2580, right around where it closed on June 7th.  Since then, we’ve had a Spanish bank bailout and a favorable outcome on the Greek elections, but no rally in the Euro.  And that’s with a backdrop of potential easing options from the FOMC this week.  Meanwhile, Spanish and Italian bond yields continued higher today, and remember, those 2 economies combined would be the 4th biggest in the world.

As for the technicals, here’s the 3 year chart of FXE:

The previous support of 126 (from January of this year and back in 2010) has acted as resistance this month, and I think we are primed for a retest of the 118-120 level seen in 2010.  The 20 day moving average has flattened out, but the declining 50 day ma should also act as resistance on any near-term strength.  FXE has worked off the extremely oversold condition of the last month without rallying too much in price, which is also bearish.

Here’s the trade:

TRADE: FXE ($125.20) Bought the Sept 124 puts for 2.81
  • Bought 1 Sept 124 put for 2.81

Break-Even on Sept Expiration:

  • Profits below 121.19, losses of up to 2.81 between 121.19 and 124, max loss of 2.81 above 124.

TRADE RATIONALE:   A big consideration for me on this trade is which strike and maturity.  I want to give myself enough time for the thesis to play out, but of course not spend too much premium.  The Sept 124 put gives me about 3 months, which covers all the shenanigans over the course of the whole summer, and gives me profits on any break of the recent low in the Euro.  Also, given that I think we might be on the cusp of a big move, I wanted to do this trade outright rather than as a spread, since implied volatility is only 13.  I might spread it in the future if we get an implied volatility pop on any down move.