Trade Alert – (FXY) – Expiration
Expiration of the Short position in the Currency Shares Japanese Yen Trust July, 2012 (FXY) $127-$131 call spread
expiration date: July 20, 2012
Portfolio weighting: 10% = 30 contracts
This was a bet that the Currency Shares Japanese Yen Trust June, 2012 (FXY) would trade at or below $127.40 on the July 20 expiration. As it turned out, the ETF closed at $125.21, well out of the money, despite a solid “RISK OFF” rally in the final week. This renders our short position worthless, and we can close the position at the maximum profit.
As expected, the yen stagnated against the dollar in the face of continued inaction by the Bank of Japan. Japanese industry continues to bleed. Nobody cares. The Japanese government continues in disarray.
Your total profit should amount to (30 X 100 X $0.40) = $1,200. That gives you a profit on this less than three-week play of 1.20% for the notional $100,000 model portfolio. This is the same as taking out a full ¥1.10 out of the cash market on a non-leveraged basis.
It is very tempting to put the identical position back on for the August expiration and take in another 0.75% that prevailed at Friday’s Closing prices, which would add $750 in profits for our model portfolio. There is always the chance the Bank of Japan gets off its duff and engages in more, much needed, quantitative easing and foreign exchange market intervention, driving the dollar back up to ¥85. In that case, this short call spread vaporizes in a nanosecond.
However, I am loath to stick my head out of the trenches in front of this week’s Fed meeting, which is probably the last chance to launch QE3 this year. If they do, the yen will crash. If they don’t, it will rocket. I am in regular touch with four out of the 12 sitting Fed governors. But opinions are divergent and there is no clear consensus on what course of action to take. So, I doubt the Fed will take any action at all, but I am not willing to put my money where my mouth is at this stage.
I would also like to point out here that those who held on to the short (TLT) $130-$135 calls spread into expiration made a nice profit. The ETF expired at $130.06 on Friday, just 0.06 points into the money. That gave them a profit of (25 X 100 X $0.48) = $1,200, or 1.20% for the notional $100,000 model portfolio. I however, wimped out four days early, so I won’t be able to book this gain to the model portfolio track record.
It seems like shorting the (TLT) call spread five points out of the money on a spike is the magic number, as it has worked three months in a row. On this one too, I am awaiting the Fed to show its hand before I take more decisive action. That leaves me with a 100% cash position for the first time this year. Given the tales of woe I am hearing from hedge fund manager friends at home, this is undoubtedly the right course of action. Live to fight another day.
Thank You Madame Butterfly