Long term relationships often get tested. What was working when they first started sometimes fades away. One of the parties may start to lose interest in the other. Sometimes one side feels like it is not a mutually beneficial arrangement. Times change and so do the people involved. We are seeing a little of that this week with the United Kingdom and the European Union.
We have a new buzzword; Brexit, as in British Exit. London’s colorful Mayor Boris Johnson has suggested that a departure from the EU would be best for his city and the rest of the UK. The EU has been around officially since 1993, but its beginnings go back to a post war Europe in recovery in the 1950s. There are plenty of politics at hand, but many in the UK would like to leave the 28 country EU and see how their economy stands completely on its own.
We saw both the Pound and the Euro take some hits as the Brexit talk heated up. The Pound dipped to its lowest level in nearly seven years. Markets obviously react to news that can have impacts on a nation’s s economy. In the case of Brexit we are talking about the whole continent and perhaps a weakened EU. Markets also tend to overreact on such news.
With the vote taking place on June 23rd on whether the UK should stay or go, I think we can see a bounce from the recent lows between now and then. I like buying the June British Pound 143-145 call spread at 50 points (312.50). This is a sit back and hole em’ trade, anticipating a possible move higher. We are long premium, and our risk is defined to the cost of entry plus fees and commissions. Full value of the spread at expiration with both strikes in the money is 200 points; I am setting a target exit of 150 points. I would look to limit my loss to 25 points if the Pound does not see a rally.
For those interested Walsh Trading is holding our weekly grain webinar Thursday February25th at 3:00 PM Central time hosted by our Senior Grain analyst Tim Hannagan. Tim has been ranked #1 by Reuters and Bloomberg in 2011 and 2012 for his most accurate end of year price predictions for soybeans and corn. Registration is free and if you cannot attend live, a recording will be sent to your email upon signup.
Director of Commercial Hedging
Walsh Trading Inc.,
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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.