Ok, let’s get it over with; will there be any weird things happening today since it is 9/9/9?

Anyway, the December Dollar index is currently down 24 ticks at 77.35 this morning as I write. In case you were wondering, the all time low for the Dollar Index since it began trading in the mid 1980’s was last year, in 2008, down at the 70.698 level. Given the negative comments out of places like China about the dollar recently, there is no reason why the dollar can’t fall back to those 2008 lows once again. Currently, the directional movement indicators are bearish and the ADX line is just beginning to rise. We attempted to buy the December 78 to 76 put spread yesterday for 70 ticks but were unsuccessful in filling. For today, I recommend trying to buy one December Dollar (77.00 strike) put and selling 2 December Dollar (74.00 strike) puts at a cost of 30 ticks or $300.

These options expire in 86 days. This is a ratio put spread. In this case we would be able to be short one December Dollar Index at 77.00 and be able to maximize our profit at expiration if prices finish at 74.00. At the 74.00 level at expiration, the profit would be $2700, ($3000 minus our $300 entry cost). But since we would be short 2 of the 74.00 puts, we would be giving some of our profits away as prices fall below 74.00. Breakeven, at expiration on the bottom side would be at 71.30. At expiration, if prices finish at 71.30, we would have a $300 gain to offset the $300 initial cost of the trade. Below that level, we would lose $10 per tick, so at 71.29, we would be losing $10 at expiration. On the top side, our breakeven would be at 76.70, or 30 ticks below the top strike price of 77.00 to cover the $300 initial cost of the trade. So if prices stay above 77.00, our maximum risk would be $300 for this trade.

I like this trade because it participates in the dollar dropping down towards the 71.00 area of the all time lows. My goal would be to take profits early if the dollar sinks towards the 74.00 area. The amount of the profit is unknown because it will depend on how much time it takes to get to 74.00. The longer it takes to get there, the better for us, because the time erosion of the two short 74.00 puts will add to our profits.

Sep. 9, 2009
David Hall