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.
Sell the Currency Shares Japanese Yen Trust (FXY) December, 2013 $102-$105 in-the-money bear put spread at $2.95 or best
expiration date: December 20, 2013
Portfolio weighting: 10%
Number of Contracts = 38 contracts
Last week, I begged you, pleaded with you, and even pounded the table to get you to increase your shorts in the Japanese yen (FXY), (YCS), and longs in the Japanese stock market (DXJ). I was certain that Japan’s beleaguered currency was about to break out of its tedious six month trading range and plumb new lows.
I turned out to be dead right.
My argument was that with the economy slowing, and Prime Minister Shinso Abe’s “third arrow” economic reforms mired in the political muck, the Bank of Japan would have little choice but to accelerate its quantitative easing program. This would be terrible news for the yen and great news for stocks (DXJ), not just in Japan, but everywhere.
It turns out that while politicians are dithering, the central bank has little choice but to over stimulate on the monetary side to compensate. Haven’t I heard this story somewhere else before?
Take a look at the charts below, put together by my friends at Stockcharts.com. The (FXY)/(DXJ) inverse relationship is almost perfect. This is because a falling yen causes the profits of Japanese exports to rocket when they are translated back into their home currency. Look no further than Toyota’s (TM) fabulous 70% YOY profit gain.
Both charts are showing a major breakout for extended continuation triangles. The yen is telling you to load up on stocks, while stocks are telling you to sell the hell out of the yen. I say do both. In the global macro world I doesn’t get any easier than this.
If you want to peruse these matters in the depth they deserve, please click here for “Doubling Up On My Yen Shorts”, and “The Party is Just Getting Started With the Japanese Yen”.
However, regarding the Currency Shares Japanese Yen Trust (FXY) December, 2013 $102-$105 in-the-money bear put spread we already have on board, we have already sucked this position dry. At today’s prices, we can realize 87% of its maximum potential profit, and that is still with more than a month to go to expiration. The risk/reward has swung against us, and it is not worth hanging on for the extra 13%.
Give me a yen rally to sell into, and I will be back into this position in a heartbeat, as I have already done with bonds (TLT).
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 execute the legs individually or you will end up losing much of your profit.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months farther out.
Here are the specific trades you need to execute this position:
Sell 38 December, 2013 (FXY) $105 puts at…………..……$7.55
Buy to cover short 38 December, 2013 (FXY) $102 puts at..$4.60
Net Profit: $2.95 – $2.65 = $0.30
(38 X 100 X $0.30 ) = $1,140 or 1.14% profit for the notional $100,000 portfolio.