Follow Up to (FXY) January 10, 2013

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.

Trade Alert – (FXY)-Update

Buy the Currency Shares Japanese Yen Trust (FXY) February, 2013 $113-$118 in-the-money bear put spread at $4.20 or best

Opening Trade

1-10-2013

expiration date: February 15, 2013

Portfolio weighting: 10% = 22 contracts

This is a bet that the Currency Shares Japanese Yen Trust (FXY) trades at or below $113 on the February 15 expiration.

If you are unable to do this options trade for any reason, you might look at buying the ProShares Ultra Short Yen ETF (YCS), a 200% leveraged fund that goes up when the Japanese currency goes down. I see the last quote at $52.36, down from a recent peak just short of $53.

It was just a matter of time before dreadful long-term fundamentals of the Japanese economy finally fed through to their currency.

I am now getting distressed calls in the middle of the night from friends in Japan. They tell me that the Ministry of Finance is calling emergency meetings with the major Japanese government bond syndicates over how to place more paper. It looks like the Mandarins in Tokyo may finally be hitting a wall on how many bonds they can force domestic institutions to buy.

The real kicker here is that I received another call yesterday informing me that the new LDP government plans to announce a massive supplementary stimulus budget amounting to 2% of GDP. This opens up the possibility that we might get a straight line move in the (FXY) from $126 all the way down to $105 without a break. This will be one of the sharpest moves in foreign exchange market history.

If that is the case, the implications for the global financial system will be momentous. It is a disaster that has been 20 years in the making. For more depth on why you should despite the Japanese yen, please click here for my October 23 piece, “The Fat Lady is Singing for the Japanese Yen” at http://madhedgefundradio.com/the-fat-lady-is-singing-for-the-japanese-yen-2/.

The logic of the foreign exchange market is quite simple. A stronger than expected US economy means that there is less need for quantitative easing from the Federal Reserve, which is great news for the dollar.

The fat got poured on the fire for the yen in December when the Liberal Democratic Party swept to power in December elections on a weak yen platform. Since then, they have been running the printing presses overtime.

This is not just a one-day wonder. I think we are on the cusp of getting a whole raft of positive data points for the US economy (click here for my 2013 Annual Asset Review at http://madhedgefundradio.com/2013-annual-asset-class-review/).

This is not a perfect entry point, as the yen has already seen its sharpest move down in 2 ½ years. But it does give us a core position in the Japanese currency we can trade around. With the cash market just having plummeted from ¥77 to ¥88 to the dollar, we may mill around here for a while to digest the move before we break to new ground. This put spread benefits from that scenario.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous. Don’t buy the legs individually or you will end up losing much of your profit up front. If you don’t get filled, then just wait for the next Trade Alert. There will be many fish in the sea.

The same applies if, for any reason, you don’t understand this trade. Better to watch this strategy unfold on paper in the model portfolio before you try it with real money.

Keep in mind that these are ball park prices only. Spread pricing can be very volatile on expiration months farther out.

These are the trades you should execute:

Buy 22 February 2013 (FXY) $118 puts at………………$6.80
Sell short 22 February 2013 (FXY) $113 puts at..……….$2.60
Net cost:………….…………………………………………$4.20

Maximum potential profit at expiration: $5.00 – $4.20 = $0.80

(22 X 100 X $0.80) = $1,760 or 1.76% profit for the notional $100,000 portfolio.

FXY 1-10-13

YCS 1-10-13

YEN Cracked

Look Out Below