Get Some Bang from the Busted Euro With FXE Put Options

Get Some Bang from the Busted Euro with FXE Puts

Here’s a low-risk way to make quick cash from this fallen currency

By Stutland Volatility Group Feb 2, 2012, 7:33 am EDT February 2, 2012

While there may be a glimmer of hope for a turnaround in the euro-zone’s economy in late 2012 and into early 2013, according to data from Standard & Poor’s today, the euro-zone debt crisis continues to take its toll on its member countries … and, in turn, on the currency itself.

The latest batch of economic data out of the euro zone suggests that the economy contracted at the end of 2011. December consumer spending unexpectedly fell in Germany and France, and the euro-area unemployment rate continued to hover at 13-year highs of 10.4%. Italian unemployment climbed to 8.9%, while Spain’s came in at a staggering 22.9% and Greece’s not far behind that at 19.2%.

Based on this data, estimates suggest euro-zone GDP fell an annualized 1% to 1.5% in the fourth quarter of 2011. The official GDP report is due out Feb. 15.

To play this, let’s get out in front of that report and buy the CurrencyShares Euro Trust (NYSE:FXE) March 127-131 put spread.

The FXE is an Exchange-Traded Fund that provides exposure to the EUR/USD exchange rate. This way, you are able to take advantage of movements in the euro through a familiar trading vehicle (ETF) that trades on the U.S. exchanges without having to enter the currency markets directly.

Prices that work are selling the FXE March 127 Put for $1.15 and simultaneously buying the FXE March 131 Put for $2.75, resulting in a net debit of $1.60 per share ($160 per contract) to enter this trade. However, the amount you collect or pay for the individual “legs” of the spread doesn’t matter, as long as you enter the trade for a total cost of $1.60 or less.

This FXE put spread is an efficient way to gain bearish exposure to the euro for minimal upfront costs and while keeping risk fixed and limited. Should FXE close below $127 at March expiration, the trade returns a hefty 133% return on risk. Should FXE close above $131 at March expiration, the trade’s losses are limited to $1.60. It is this favorable risk/reward ratio that makes this the most compelling way to profit from the latest euro-zone woes.

Stock/Index: FXE

Stock Price: $130.25

Option Play: Bear Put Spread

Sell: March 127 Put @ $1.15

Buy: March 131 Put @ $2.75

Net Cost: $1.60 = $2.75 – $1.15 (Long Put – Short Put)

Breakeven: $129.40 = $131.00 – $1.60 (Long Put – Net Cost)

Max Profit: $2.40 = [($131-$127) – $1.60] [(Spread Width) – Net Cost]

Max Loss: $1.60 = Net Cost