The March Euro is down 188 ticks from Wednesday’s close at 1.4940 this morning as I write. The huge spike down is a result of yesterday’s announcement by Dubai that they want to delay making payments on about $60 billion owed to 70 international banks. This sudden announcement has given rise to a lot of panic trading as investors fear the repercussions at the banks that are involved. I see that most, if not all of the individual banks involved have less than $2 billion in exposure to Dubai. That seems a trivial amount considering what those same banks have written off and gone through over the past year. But on a day when volume is always light, prices can swing all over the place. My experience is to take advantage and liquidate the positions that are making any wind fall profits but refrain from putting on too many new positions until the smoke clears from this news. We don’t know what other news, if any, is lurching behind the door.
On Wednesday, we were successful in buying one March Euro (1.5750 strike) call option at 134 ticks or $1675 gross, and selling 2 March Euro (1.6100 strike) calls at 75 ticks each or $937.50 each. The overall total gross credit received to do this trade was $200. So, if in 98 days when these options expire, if the March Euro never makes it to 1.5750 then the options will expire worthless and we will keep the $200 they paid us up front. The maximum gain would be if, at expiration, the March Euro closes at 1.6100, then the gross gain could be as much as $4375. The risk on this trade as is the case on any ratio call spread is if the March Euro, in this case, rallies to a through the 1.6100 area too soon. In that case the risk could be unlimited unless we liquidate the position. My strategy would be to liquidate the trade if the euro traded up to the area of 1.6100 too soon without a lot of time value lost. The best way for us to profit on this trade is if the euro trends up toward 1.6100 over the next 98 days. So, this downward price action today does not hurt this trade at all and just uses up time value which will help this position in the long run.
Followers of this letter should also be long one December Euro (158.00 strike) call option from 32 ticks and short 2 December Euro (160.00 strike) call options from 20 ticks each for a combined credit of 8 ticks or $100 gross. Option expiration is in 7 days.
Followers should also be long one March Euro (1.3850 strike) put from 121 ticks and short 2 March Euro (1.3400 strike) put options from 67 ticks each for an overall credit of 13 ticks or $162.50 gross.
You should also be long one March Euro (1.5750 strike) call option at 134 ticks and short 2 March Euro (1.6100 strike) calls at 75 ticks each or $937.50 each.
March Euro options expire in 98 days.
David Hall
The information and opinions contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The risk of loss in trading futures and/or options can be substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.
This newsletter is not intended for dissemination to the public without prior approval from David Hall.
