The Context

The Canadian Dollar (Loonie) is trading near 80 again after a visit below 78 last month. When the US Dollar flexed its muscles in March, foreign currencies had a steady decline. After lingering at the lower end of the range, the Loonie put in a recent high of 80.65 before trending lower again.

Crude Oil has had a recent bounce as well. If you already follow the Loonie, you know that it will often trend along with crude.  I think much of the recent move in crude is a result of geo-political events (Yemen situation). Without further escalation, I am looking for crude to move lower again, towards the 48.00 mark. The Loonie should look a bit weaker as well, as the USD strengthens and crude moves lower.

I often talk about defining risk when get into a trade. Options spreads can help you define your risk parameters and know what your “worst case scenario” would be. I am going to look to sell premium, and take advantage of a potential decline in the Canadian Dollar.

The Trade

  • I like selling the May Canadian Dollar 80-81 call spread at 50 points ($500.00) or better.
  • You collect premium on entry, and define risk at the same time by shorting the 80 call and buying the 81 call. 
  • If we get in at 50 points, the risk is also 50 points.
  • Maximum loss would occur if both strikes are in the money at expiration.
  • I am looking to stay in until expiration with the view the Loonie will be under 80, and the options will expire worthless.

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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.