Follow Up to Trade Alert - (FXY) October 23, 2014
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.
Further Update to: Trade Alert - (FXY)
Buy the Currency Shares Japanese Yen Trust (FXY) November, 2014 $92-$95 in-the-money vertical bear put spread at $2.75 or best
Opening Trade
10-23-2014
expiration date: November 21, 2014
Portfolio weighting: 10%
Number of Contracts = 43 contracts
?Oh, how I despise the yen, let me count the ways.?
I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.
To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:
1) With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials between countries are the single greatest driver of foreign exchange rates. That means the yen is taking the downtown express.
2) This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets. So ?RISK ON? means more yen selling, a lot.
3) Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re just not making enough Japanese any more. Countries that are not minting new consumers in large numbers tend to have poor economies and weak currencies.
4) The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 250% of GDP, or 120% when you net out inter agency crossholdings, Japan is at the top of the list.
5) The Japanese ten-year bond market, with a yield of only 0.47%, is a disaster waiting to happen. It makes US Treasury bonds look generous by comparison at 2.25%. No yield support here whatsoever.
6) You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters and revive the economy.
When the big turn inevitably comes, we?re going to ?110, then ?120, then ?150. That works out to a price of $200 for the (YCS), which last traded at $62. But it might take a few years to get there.
If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360. To me the ?83 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.
You can put on this trade anywhere from a $2.60-$2.80 range and have an excellent chance of making money.
Since we now have a huge profit on our double short position in the Euro (FXE), I have room to increase my exposure in the foreign exchange asset class.
The Japanese yen (FXY) has so far lagged in its return to a ?RISK ON? direction. That is, until today.
So I am going to jump in here with a bet that the yen is going down by strapping on a Currency Shares Japanese Yen Trust (FXY) November, 2014 $92-$95 in-the-money vertical bear put spread. With only four weeks to expiration, this is an incredibly rich put spread to have on.
If you can?t to the options, a nice alternative is to buy the ProShares Ultra Short Yen ETF (YCS) outright.
An extended research piece on why you should despise the Japanese yen will follow shortly.
If you have any questions on how to execute this trade, go to my Vertical Bear Put Spread Training video at https://www.madhedgefundtrader.com/ltt-executetradealerts/ .
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 43 November, 2014 (FXY) $95 puts at?????$5.00
Sell short 43 November, 2014 (FXY) $92 puts at..??.$2.25
Net Cost:??????????????????.....$2.75
Profit at expiration: $3.00 - $2.75 = $0.25
(43 X 100 X $0.25 ) = $1,075 or 1.08% profit for the notional $100,000 portfolio.
