The Canadian dollar is often viewed as a commodity currency. The term refers to the view that a country’s currency is tied heavily to the commodities and natural resources it produces and exports. In the case of Canada, the Loonie (as the Canadian Dollar is often referred to) often trends with crude oil.

Since the beginning of the year, the Loonie has traded from just shy of 86.00 to a low of 78.49. This move has been helped and supported as crude oil has continued to slide down over the same time frame. A surprise interest rate cut by the Bank of Canada in January to .75% probably helped move the Canadian Dollar continue to drift lower against the U.S. Dollar as well. This week Bank of Canada Governor Stepehen Poloz said that the decision in January was the right amount of “insurance” to help stabilize the economy. Most observers think this means that the Bank of Canada will leave rates alone at the next meeting on March 4th.

The Trade

  • I’m looking at something a bit different this week. Currently the March Canadian Dollar is trading above 80.00. I think we are going to drift lower ahead of the meeting next week.
  • I like selling an in the money call spread with defined risk.
  • I am looking to selling the March Canadian Dollar 78-79 call spread (sell the 7800 call, buy the 7900 call) at 90 points ($900.00). We will collect premium on entry of the trade.
  • If both strikes are in the money at expiration, full value of the spread is 100 points ($1000.00), so we are risking 10 points ($100.00) plus fees and commissions.
  • Expiration is on March 6th, so this is a fairly short term trade. I am setting a target exit at 40, looking to make 50 points ($500.00).
  • Break even occurs with the market at 78.90 at expiration.  I plan on staying in the trade until March 6th, getting out before expiration and any exercise into futures positons.

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RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT.  WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.