Trade Alert – (FXY) October 23, 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. This is your chance to ‘look over’ John Thomas’ shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen.

Trade Alert - (FXY)

Buy the Currency Shares Japanese Yen Trust (FXY) November, 2012 $124-$127 put spread at $2.55 or best

Opening Trade


expiration date: November 16, 2012

Portfolio weighting: 10% = 40 contracts

This is a bet that the Currency Shares Japanese Yen Trust (FXY) trades at or below $124.45 on the November 16 expiration in 14 trading days. This means that the cash market has to move up to ¥78.80 against the US dollar for you to lose money, against today’s spot of ¥79.80.

It is clear from the recent economic data from Japan that its cold war with China over the Senkaku Islands is really starting to bite. Relations are so bad that Japanese guests at restaurants in the Middle Kingdom are being assaulted for no reason.

Japan reported a trade deficit for the third successive month in September, with exports falling a horrendous 10.3% compared to the previous year. Imports rose a feeble 4.1%, resulting in a trade deficit of ¥559bn, or a massive $7 billion. For long time watchers of Japan such as myself (I’ve been at it for 40 years), these numbers are unheard of.

Several investment banks have predicted a recession in Japan in the third and fourth quarters. If you had any doubts about the sickly state of Japan, look at the ten year chart for the Nikkei average below. It is almost alone among major markets in failing to substantially recover from the 2008 crash, and is a mere 28% above the cataclysmic March, 2009 lows. The S&P 500 has more than doubled since then. Japan has truly been a money pit.

That means the Bank of Japan now has an extra incentive to ease at their policy meeting next week. They can do this through another quantitative easing program, lowering interest rates, or aggressive currency intervention.

If they act as I expect, then the yen will finally breach the ¥80 level, and possibly move as far as ¥85. If they don’t, we should have ample opportunity to get out with a small loss. I would like to point out that these sort of at-the-money short plays in the Japanese yen have worked every month this year, provided you were willing to take a modicum of pain along the way. Think of it as your “rich Uncle Tanaka.”

Long term readers of this letter are well aware of the deteriorating fundamentals behind the Japanese economy, which I have been writing about endlessly for the past several years (see tomorrow’s newsletter for the latest update).

If for any reason you are unable to trade in puts or put spreads, such as in a 401k, then you can buy the ProShares Ultra Short Yen ETF (YCS) outright. This is a 200% levered ETF that rises when the yen falls.

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 40 November, 2012 (FXY) $127 puts a……………….…$4.10
Sell short 40 November, 2012 (FXY) $124 puts..…………….$1.55
Net cost:………….……………………………………………...$2.55

Maximum potential profit at expiration: $3.00 - $2.55 = $0.45

(40 X 100 X $0.45) = $1,800 or 1.80% profit for the notional $100,000 portfolio.