2 Options for the Euro’s Fall and the Dollar’s Rise

by Jim Woods | December 21, 2011 9:00 am

Europe remains a fiscal mess, and despite repeated attempts to cobble together a bailout, no real plan has yet been implemented to rescue the ailing region.

The entire protracted European debt episode has had a pernicious effect on the euro, as the currency has fallen nearly 9% vs. the dollar over the past six months. The greenback, on the other hand, has been a strong performer vs. rival foreign currencies. Over the past six months, the dollar has surged about 5% vs. a basket of the world’s leading foreign currencies.

Europe’s fiscal issues pushing down the value of the euro should come as no real surprise; however, the bigger surprise is the dollar’s resurgence. The Federal Reserve keeps printing money and debasing the greenback, but Wall Street considers it the dog with the least amount of fleas on an infested global stage.

For aggressive options traders who want to take advantage of what is likely to be at least a short-term continuation of the falling euro and the rising dollar, there are two ETF option plays worth looking at.

Why Short the Euro When You Can Double-Short it Instead?

The first is on the PowerShares UltraShort Euro (NYSE:EUO[1]). This fund seeks to deliver performance results equal to twice the inverse of the daily performance of the U.S. dollar’s price vs. the euro.

So, if the value of the dollar vs. the euro falls 2%, then EUO should rise 4%. The two-beta nature of this fund makes it a very fast mover, but faster still are the options pegged to its fortunes.

For aggressive traders who want to bet against the euro and on the greenback, check out the slightly out-of-the-money EUO Jan 22 Call.

The Dollar’s Future(s) Look Bright Here in the Short Term

The second is on the PowerShares DB US Dollar Index Bullish (NYSE:UUP[2]). This fund tracks the Deutsche Bank Long U.S. Dollar Futures index.

That index is comprised of long futures contracts that essentially replicate the performance of being long the U.S. dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish kroner and Swiss franc.

Basically, UUP is the greenback vs. the world.

If the dollar’s fortunes continue to rise, then traders can profit by being long the out-of-the-money UUP Jan 24 Call.

One note of caution here is that both of these currency ETF options trades can move very fast. And due to the leverage on EUO, the fund can move extremely fast in either direction. That means you should make sure you know how much you’re willing to lose before you enter the trade. It also means you should take profits off the table on any big single-day moves higher.

I know it’s tempting, but these currency ETF options can be very volatile, so try to refrain from being too greedy with your falling euro, rising dollar gains.

Disclosure: At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.

Endnotes:
  1. EUO: http://studio-5.financialcontent.com/investplace/quote?Symbol=EUO
  2. UUP: http://studio-5.financialcontent.com/investplace/quote?Symbol=UUP

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