Follow Up to Trade Alert - (FXY) August 14, 2013
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.
Further Explanation to: Trade Alert - (FXY)
Buy the Currency Shares Japanese Yen Trust (FXY) September, 2013 $103-$106 in-the-money bear put spread at $2.65 or best
Opening Trade
8-14-2013
expiration date: September 20, 2013
Portfolio weighting: 10% = 38 contracts
It is looking now like there is a 50% chance that Ben Bernanke will begin tapering back his gargantuan $85 billion a month in Treasury bond purchases. The basis for doing so will be an improvement in data releases indicating that the economic recovery may be approaching the edge of sustainability. Housing is still on fire, domestic energy is booming, and the auto industry might tweak 16 million in annual production this year, up huge from the 9 million low.
If the long predicted pullback from quantitative easing occurs, several easily predictable events will rapidly unfold in the financial markets. Interest rates will spike up as the bond market suffers another leg down. Commodities will weaken once more. The dollar will enjoy a major rally, as its interest differential against other currencies expands.
This means that it is time to sell short the Japanese yen once again. When we peaked in March around the ?100 level in the cash markets, I thought that we could enter a sideways consolidation that could last as long as six months, since the recent move down had been one of the sharpest in foreign exchange history. That is exactly what we got.
Analyzing the longer-term charts, it looks like we are forming a wedge formation that will eventually resolve itself downward for the suffering Japanese currency. In this situation an in the money bear put spread is ideal when compared to an outright put, as no one can tell you with any real certainty how long it will take until the final breakdown to ?110 and the nether regions occurs.
As I am still sitting in my suite at the British Army Officers Club in the Piccadilly area of central London, I am reluctant to get more aggressive (I managed to get an upgrade to a general officers accommodation, as everyone is on vacation). The Internet here sucks, with 19th century speeds.
My market sources either don?t want to wake me up in the middle of the night because of time zone considerations, or don?t know my cell number. And, oh yes, my finger tips are still rubbed raw from climbing the Matterhorn last week, hand over hand, and typing is painful (I am writing this Trade Alert poking the keys on my laptop with a pencil in my mouth). So I?m not yet completely set up for short term trading. That will change when I get home in five days.
My lightweight vacation trades did well. The gold long was a home run, my previous yen short coined it, and I am breaking even on my Euro short. But we are still in thin summer trading, and the ?B? Teams are manning the hedge fund desks.
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 38 September, 2013 (FXY) $106 puts at?????$6.50
Sell short 38 September, 2013 (FXY) $103 puts at..??.$3.85
Net Cost:????????????????.....$2.65
Profit at expiration: $3.00 - $2.65 = $0.35
(38 X 100 X $0.35) = $1,330 or 1.33% profit for the notional $100,000 portfolio.
