If you are a person that likes to follow markets there are usually a few things that regularly grab your attention. Even the most novice observer tunes in when we there are violent swings in either direction. Earlier this week was the four year anniversary of the “Flash Crash”, when the S&P dropped 3% in about four minutes, and then recovered the losses in a similar amount of time. Anyone who was trading that day remembers it vividly. Fortunately those days are pretty rare. Another thing that can catch a trader’s eye is when the current price levels don’t seem to add up.
Things have settled down in Europe a bit since it was faced with the Greek debt crisis in 2010. The bailout packages by the EU and IMF helped provide much needed stability across the Euro zone. Those efforts did not full resolve the issues however, and there is a decision to be mad by EU policy makers on a third proposal within the next few months. The EU faces many of the same issues as we do domestically (slow job growth, threat of inflation), which does paint the rosiest of pictures.
The Euro Currency is trading near two month highs, and has gained over 4% over the last six months. This has occurred while the ECB continues to maintain low interest rates, with no changes in sight. The ECB is not necessarily a fan of the Euro trading near the 140 level, and ECB President Draghi has hinted that a quantitative easing program similar to the U.S. (printing currency to drive down value) may be necessary.
I’m looking for a retracement from current levels, with or without help from the ECB. I like buying the June Eurocurrency 138-136 put spread at 32 points ($400.00) or better. We are buying premium so risk is defined to the cost of entry plus fees and commissions. Full value of the spread at expiration is $2500. I am setting a target exit at the 100 point level. If the Euro maintains its current trend, I would look to get out and minimize losses, exiting at the 20 point level.
Numbers can be deceiving sometimes. A strong currency isn’t always a sign that everything is on the way up. When it comes to trading I am a fan of the “hope for the best, prepare for the worst” mantra. All trends eventually come to an end. It’s better to prepare for that end than joining the masses in the mad rush to get out.
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.
