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.
Explanation to Trade Alert – (FXY)
Buy the Currency Shares Japanese Yen Trust (FXY) April, 2013 $107-$112 in-the-money bear put spread at $4.40 or best
expiration date: April 19, 2013
Portfolio weighting: 10%
Time to sell the breakdown in the Japanese yen, which cratered to a new three year low in Tokyo last night. Now that we have clearly breached ¥94 in the cash market, ¥96 is in our sights, $103 in the (FXY), and $61 in the (YCS).
The whole world has been looking to sell the yen on any rally. The brief one we got only lasted a day. Last night, the foreign exchange market gave the middle fingered salute to outgoing Bank of Japan governor Masaaki Shirakawa, who held his last policy meeting in Tokyo yesterday.
Unsurprisingly, he took no action. However, a motion was tabled, and then voted down, to move a monetary expansion planned for 2014 up to this year. Hence the dramatic market move, bringing our long, sideways, “time” correction in the yen to an abrupt end.
His replacement, my old friend, Haruhiko Kuroda, is expected to be far more aggressive in his monetary easing. He was heard this week speaking on the phone to Fed governor, Ben Bernanke, getting a private tutorial on advanced quantitative easing techniques.
There is a method in my madness with this particular setup. During the horrific four-handle pullback on February 25, $108 was the top end of the move on a day of frenzied trading in the (FXY). That level now defines our risk, should the beleaguered Japanese currency get hit with another round of profit taking by massive, generational shorts.
I was hoping that the market would wait another week for my expiring March short positions to go off the board before I rolled into April. It was not to be. But there are just too many people waiting to jump the gun and get into this trade.
Last night’s mark-to-market value for my existing 20% weighting in the Currency Shares Japanese Yen Trust (FXY) March, 2013 $110-$115 in-the-money bear put spread was at $5.00, its maximum expiration value. However, if you tried to execute in the options market, you got less than this, due to the illiquid nature of the market for deep out-of-the-money options that expire in six trading days. So it paid to wait.
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:
Buy 22 April, 2013 (FXY) $112 puts at……………$8.60
Sell short 22 April, 2013 (FXY) $107 puts at..…….$4.20
Potential profit at expiration: $5.00 – $4.40 = $0.60
(22 X 100 X $0.60) = $1,320 or 1.32% profit for the notional $100,000 portfolio.
Time for Another Go