Trade Alert – (FXY) November 2, 2012

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)

Buy the Currency Shares Japanese Yen Trust (FXY) January, 2013 $119-$124 in-the-money bear put spread at $2.35 or best

Opening Trade

11-2-2012

expiration date: January 18, 2013

Portfolio weighting: 5% = 21 contracts

This is a bet that the Currency Shares Japanese Yen Trust (FXY) trades at or below $119 on the January 18 expiration. Please note that this is in addition to my existing 10% weighting in the November, 2012 (FXY) $127-$124 in-the-money bear put spread which is already highly profitable.

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.

It was just a matter of time before dreadful long term fundamentals of the Japanese economy finally fed through to their currency. It appears that the much better than expected US jobs data has at last done the deed.

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.

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. If you had any doubts about this analysis, look no further than the price of gold, which is getting the stuffing knocked out of it today, down $35. Gold without monetary stimulus is just a heavy yellow metal. The fat got poured on the fire for the yen on Tuesday when the Bank of Japan announced another ¥11 trillion ($90 billion) worth of monetary easing.

This is not just a one day wonder. I think we are on the cusp of getting a who raft of positive data points for the US economy (click here for My 2012-13 Stock Market Forecast at http://madhedgefundradio.com/my-2012-13-stock-market-forecast/ ). You will see in my Monday letter than I am doubling the number of black swans from four to eight.

There is also a fascinating development unfolding on the charts. Look at the weekly chart below for the (FXY). Now that we have decisively broken through the 50 day moving average, we are clearly targeting the 200 day moving average at $116. I have structured the strikes on my in-the-money bear put spread accordingly.

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 21 January, 2013 (FXY) $124 puts at……………….…$3.05
Sell short 21 January, 2013 (FXY) $119 puts at..………….$0.70
Net cost:………….……………………………………………$2.35

Maximum potential profit at expiration: $5.00 – $2.35 = $2.65

(21 X 100 X $2.65) = $5,565 or 5.57% profit for the notional $100,000 portfolio.

Look Out Below!

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